audit quality in practice: a study of perceptions of

Audit Quality in Practice: A Study of

Perceptions of Auditors, Audit Committee

Members and Quality Inspectors

A thesis submitted to the University of Manchester for the degree of Doctor of Philosophy in the Faculty of Humanities

2011

Noor Adwa Sulaiman

Manchester Business School

1

CONTENTS

List of tables 4

List of figures 5

Abbreviations 6

Abstract 7

Declaration 9

Copyright statement 9

Acknowledgements 10

Dedication 11

Chapter 1: Introduction 12

1.0 Subject of the Thesis 12

1.1 Regulatory Framework in the UK 12

1.2 Audit Quality 16

1.3 Research Questions and Research Approach 18

1.4 The Justification and Importance of the Study 19

1.5 Structure of the Thesis 20

Chapter 2: Perspectives on Audit Quality 21

2.0 Introduction 21

2.1 Research Approaches to Audit Quality 22

2.1.1 Research Approaches derived from DeAngelo‘s Definition

of Audit Quality 23

2.1.2 The Audit Process and Audit Quality 32

2.1.3. Perceptions of Audit Quality 38

2.1.4 The Limits of the Traditional and Other Approaches

to Audit Quality 43

2.1.5 Auditing Practice in its Organisational and Social Context 45

2.2 Professional Perspectives on Audit Quality 53

2.3 Regulatory Perspectives on Audit Quality 56

2.3.1 The AIU Perspective on Audit Quality 58

2.3.2 The FRC Perspective on Audit Quality 61

2.4 The Corporate Governance Framework 63

2.4.1 The Audit Committee 64

2.4.2 Audit Committee Effects on the Audit Function 67

2.5 Implications of Research and Research Questions 74

2.6 Summary 76

Chapter 3: Theoretical Framework and Research Design 78

3.0 Introduction 78

3.1 Research Methodology 78

3.2 Theoretical Framework for the Research 81

3.3 Research Method 87

3.3.1 Research Design 87

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3.3.1.1 Collection of Data and Analysis of

Comment Letters 88

3.3.1.2 Collection of Data and Analysis of

Semi-structured Interviews 90

3.3.1.3 Collection of Data and Analysis Survey

Questionnaire 93

3.4 Summary 94

Chapter 4: Audit Quality in Practice-the FRC Discussion Paper 96

4.0 Introduction 96

4.1 Introduction and Justification for the Documentary Study 96

4.2 Comments on the Discussion Paper 99

4.2.1 Audit Firm Culture 99

4.2.2 The Quality of People 101

4.2.3 The Effectiveness of the Audit Process 103

4.2.4 The Reliability and Usefulness of the Audit Report 104

4.2.5 Other Factors Affecting Audit Quality 105

4.2.6 Other Issues 106

4.3 Questions for Consideration 110

4.4 Summary 114

Chapter 5: Audit Partners’ Perceptions Concerning Audit Quality 115

5.0 Introduction 115

5.1 Meanings of Audit Quality in Practice 115

5.1.1. Professionalism 116

5.1.2 Compliance Obligations 117

5.1.3 Commercial Values 120

5.2 Factors Influencing the Construction of the Meanings of

Audit Quality 124

5.3 Representations of Audit Quality in Practice 132

5.4. Quality Conflicts in Practice 136

5.5 Perceptions Concerning the Impact of the Role of the

Audit Committee on Audit Quality 139

5.6 Summary and Conclusions 143

Chapter 6: Audit Committee Members’ Perceptions Concerning

Audit Quality 147



6.1.1 Characteristics of the Audit Firm 148

6.1.2 Professionalism of Individual Auditors 149

6.1.3 Risks Orientation 150

6.1.4 Financial Reporting Orientation 151

6.2. Factors that Influence the Construction of the Meanings of

Audit Quality 153

6.3 Representations of Audit Quality in Practice 159

6.4 Effects of the Audit Committee on the External Audit 163


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Chapter 7: Quality Inspectors’ Perceptions Concerning Audit Quality 171


7.1 Profile of Quality Inspectors 172


7.3 Factors Influencing Audit Quality in Practice 179

7.4 The Level of Audit Quality Attained in Practice 188


Chapter 8: Conclusion 195


8.1 Review of Significant Findings 196

8.2 Contributions and Limitations of the Study 202

8.3 Limitations and Suggestions for Future Research 205

Appendices 208

References 241

Word count: 79,115

4

LIST OF TABLES

Table 2.1 List of Specific Quality Threatening Behaviour 35

Table 2.2 The AIU Monitoring Framework 59

Table 3.1 Categorisation of Interviewees 91

Table 3.2 Response Rates for the Questionnaires 93

Table 4.1 Respondents to the Discussion Paper 97

Table 4.2 Analysis of Significant Responses Received by

the FRC on the Discussion Paper Promoting

Audit Quality 98

Table 7.1 Gender of Quality Inspectors 172

Table 7.2 Age of Quality Inspectors 173

Table 7.3 Educational Level and Professional Qualification

of Quality Inspectors 173

Table 7.4 Position of Quality Inspectors 174

Table 7.5 Working Experience of Quality Inspectors 174

Table 7.6 Proportion of Time in Different Types of Audit Firms 174

Table 7.7 Proportion of Time in Different Types of

Audit Engagement 175

Table 7.8 Attributes of Audit Quality in Practice 176

Table 7.9 Perceptions of the Impact of Business, Accounting

and Auditing Factors Affecting Audit Quality in Practice 181

Table 7.10 Rank Items Influence on the Conduct of

Audits in Practice 182

Table 7.11 Internal Factors Affecting Audit Quality in Practice 184

Table 7.12 General Views about Audit Quality in Practice 189

Table 7.13 Issues Arising in the Process of Inspection 191

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LIST OF FIGURES

Figure 1.1 The Structure of Audit Regulation 14

Figure 2.1 Aspects to Audit Quality 23

Figure 2.2 Inputs and Outcomes Related to Audit Quality 24

Figure 2.3 The Audit Process and Audit Quality 32

Figure 2.4 The System of Auditing Knowledge 52

Figure 2.5 Practitioners‘ Construction of Audit Quality 55

Figure 2.6 Regulators‘ Construction of Audit Quality 57

Figure 2.7 AIU Verification of Audit Quality 60

Figure 2.8 The FRC Audit Quality Framework 62

Figure 3.1 Theoretical Framework 86

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ABBREVIATIONS

AC Audit committee

AIDB Accountancy Investigation and Discipline Board

AICPA America Institute of Certified Public Accountants

AIU Audit Inspection Unit

APB Auditing Practices Board

AQF Audit Quality Forum

ASB Accounting Standards Board

CCG Committee on Corporate Governance

ESB Ethics Standard Board

FRC Financial Reporting Council

FRRP Financial Reporting Review Panel

GAAP Generally accepted accounting principles

IAASB International Auditing and Assurance Standards Board

ICAEW Institute of Chartered Accountants in England and Wales

ICAI Institute of Chartered of Accountants in Ireland

IDB Investigation and Discipline Board

IFAC International Federation of Accountants

IFRSs International Financial Reporting Standards

IPO Initial public offering

ISAs International Standards on Auditing

ISQC1 International Standard on Quality Control 1

JDM Judgement and decision making

PCAOB Public Company Accounting Oversight Board

POB Professional Oversight Board

POBA Professional Oversight Board for Accountancy

QTB Quality threatening behaviour

SOX Sarbanes-Oxley Act

URT Under reporting time

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ABSTRACT

The aim of this thesis is to provide insights into what the concept of audit quality

means for a number of parties who have responsibilities for delivering,

commissioning or evaluating audit quality in practice - auditors, AC members and

quality inspectors concerning. It explores the influence of internal and external

factors in the auditing setting on the construction of meaning of audit quality and

how meaning is symbolised in practice. This research is based on an interpretive

approach employing research methods of document analysis, semi-structured

interviews and a survey questionnaire. Drawing on a symbolic interactionist

framework, the research illustrates the process of giving meaning to audit quality in

practice.

The study identifies various constructs that give meaning to audit quality in practice

– auditors‘ characteristics, firm‘s characteristics, compliance obligations, the

content and control of audit procedures, financial statement quality and client

service orientation. It also identifies acts such as asking challenging questions,

professional appearance, the quality of interaction between auditor and AC,

consultation and training, and objects such as documents and records as

fundamental in symbolising audit quality in practice. The study also highlights the

existence of possible conflicts between some of these constructs of audit quality

and the potential for problems in audit quality in practice.

The research reports that the audit practitioners predominantly framed their

conceptions of the meaning of audit quality around four important constructs: client

service, compliance obligations, the technical audit process or content, and

individual auditors‘ characteristics. Client service is found to have a particular

importance for the practitioners‘ meaning of audit quality. Their construction of the

meaning for audit quality is influenced by interactions with other audit market

constituents as well as by economic and societal forces in the auditing environment.

Auditors perceptions of what quality means in practice are underpinned by factors

such as the need to legitimise the conduct of the auditor, to restore trust and

confidence in the public at large about the quality of audit services, to maintain

profitability and the survival of the audit firm given the competitive and commercial

pressures in the audit market, and to legitimise firm methodology and the resulting audit process to outside constituents.

Amongst the AC members interviewed, the meaning of audit quality appears to be

associated with the characteristics of individual auditors, in particular, auditors‘

interpersonal and behavioural skills, attributes of the audit firm (size and industry

specialisation) and financial statement quality. The findings show that AC members

perceptions of audit quality significantly depend on the ‗relational‘ rather than the

technical attributes of individual auditors. The quality of the financial statements

also dominates the AC members‘ perceptions of audit quality rather than a technical

interpretation of the quality of the content of the audit process. The AC members‘

conception of meaning for audit quality is influenced by interaction and communication with the external auditors.

For the quality inspectors, the meaning of audit quality is mainly constructed in

relation to the conduct or content of an audit. Therefore, the level of challenge to

the management of the audit, and the sufficiency of evidence and documentation

are important for constructing their perceptions of audit quality. They also ascribe

considerable importance to the internal compliance-quality control applied within

the audit firm the notion of audit quality.

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Overall, the study describes the multifaceted meaning of audit quality and how this

is influenced and shaped by interactions – based on role expectations, self-image,

economic and social factors – and illustrates the way in which various acts and

objects are used to represent practical meaning for the abstract concept of audit

quality in practice. These findings have relevance for auditors, other parties to audit

engagements, policy makers and regulators concerned with the contribution of

auditing to the financial reporting system and for academic researchers seeking to

develop a deeper understanding of how that contribution is achieved in practice.

9

DECLARATION

No portion of the work referred to in the thesis has been submitted in support of an

application for another degree or qualification of this or any other university or

other institute of learning.

COPYRIGHT STATEMENTS

Copyright in the text of this thesis rests with the author. Copies (by any process)

either in full, or of extracts, may be made only in accordance with instructions

given by the author and lodged in the John Rylands University Library of

Manchester. Details may be obtained from the Librarian. This page must form part

of any such copies made. Further copies (by any process) of copies made in

accordance with such instructions may not be made without the permission (in

writing) of the author.

The ownership of any intellectual property rights which may be described in this

thesis is vested in The University of Manchester, subject to any prior agreement to

the contrary, and may not be made available for use by third parties without the

written permission of the University, which will prescribe the terms and conditions

of any such agreement.

Further information on the conditions under which disclosures and exploitation may

take place is available from the Head of School of Manchester Business School.

10

ACKNOWLEDGEMENTS

I wish to express my sincere gratitude to my supervisor Professor Stuart Turley,

who introduced me to see new perspective of auditing and guided me through my

PhD process. His constructive comments, encouragement and great support all

along the process are thoroughly appreciated. In addition, I thank Professor

Christopher Humphrey and all individuals who provided any kind of feedback on my

research.

Sincerest thanks also to all who facilitated and participated in the study but cannot

be named.

I thank my husband, Mohammed Hilmy, my parents, my brothers, sisters and

friends whose encouragement, inspiration and support have been vital.

11

DEDICATION

To the memory of my father Sulaiman Muhammad and my brother Aidrus Saidi Sulaiman

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Chapter 1

Introduction

1.0 Subject of the Thesis

This thesis takes as its subject the manner in which audit partners, audit committee

(AC) members and audit quality inspectors construct meanings for the concept of

audit quality that could be influential in the conduct and evaluation of audit

engagements in practice, and considers these meanings in the broader institutional

and social context of practice. Concepts of audit quality have been examined

extensively in research studies looking at the links between observable signals of

auditor quality (such as the size of the audit firm or industry specialisation) and

indicators of financial reporting quality (such as the issuance of modified audit

reports or the quality of reported earnings) (see Francis, 2004 and Watkins, Hillison

and Morecroft, 2004 for reviews of literature). In these studies, concepts of audit

quality have been normatively defined and narrowed down to specific

characteristics or decisions (Humphrey et al., 2007b) and the indicators quality of

the audit are restricted to observable aspects of the resultant financial reports

rather than the content of the audit process itself. In consequence, less is known

about how auditors‘ conceptualise the meaning of audit quality or what the term

means in the conduct of the audit, that is, the behaviours and attributes that audit

practitioners associate with audit quality. In addition, little information is available

about the understanding of AC members and quality inspectors of the term and

how it features in their evaluation process of audit quality. This study attempts to

add to research on these issues.

The remainder of this chapter is set out as follows: section 1.1. provides brief

insight into the regulatory framework for auditing in the UK; section 1.2 briefly

introduces the issue of audit quality; section 1.3 outlines the research questions

and describes the research approach; section 1.4 discusses the justification for this

study; and finally section 1.5 describes the layout of the thesis with a summary of

the contents of each chapter.

1.1 Regulatory Framework in the UK

In recent years there have been considerable developments in the auditing,

financial reporting and governance regimes around the world, with the events

involving Enron-Andersen and similar cases heightening the interest of regulators

13

and the public at large concerning auditing, financial reporting and corporate

governance practices. The cases have raised concerns in several areas relating to

the quality of audit performance, the integrity of financial statements, and the

effectiveness of the AC to oversee both the financial reporting process and the

external audit function. In response to these events, various changes to the

regulatory regime for auditing and governance practices were made in the US and

in other jurisdictions including the UK and the EU. The impact of the cases has been

marked by the strengthening of the legal regulations governing auditing and

reporting, for example through the passing of the Sarbanes Oxley Act (SOX) (2002)

in the US and the Revised Eighth Directive for member states of the EU. These have

introduced significant changes in various areas of auditing, reporting and

governance practices and include independent inspections of listed companies‘

audits, restriction of joint provision of audit and non-audit services, greater

independence in the setting of auditing standards and strengthening the role of the

AC in the financial reporting and auditing process.

Between the late 1980s and early 1990s some major changes had already been

made in the regulatory regime for auditing, corporate reporting and governance in

the UK. The changes were partly caused by corporate scandals (BCCI, Maxwell and

Polly Peck) which happened at that time. In consequence, the auditing and

reporting regime, which primarily comprised company law and self-regulation by

the accountancy bodies, was supplemented with the establishment of the Cadbury

Committee for corporate governance which led to the introduction of the Combined

Code on Corporate Governance, and the Financial Reporting Council (FRC) with its

various operating bodies, such as the Accounting Standards Board (ASB) and the

Financial Reporting Review Panel (FRRP).

In 2002 the UK government once again undertook several reforms in its

accounting, auditing and governance regime in response to Enron and other

corporate failures because of concerns with quality of financial reporting, and the

effectiveness of the audit process and the oversight role of the AC (CGAA, 2003).

Against the backdrop of the corporate failures, the Higgs Committee Report and the

Smith Committee Report were released in 2003. The Combined Code on Corporate

Governance was also updated during that year (details background on corporate

governance framework is discussed in section 2.4). The Accountancy Foundation,

which was established by the accountancy professional bodies in 2000, was

restructured and ceased regulating professional practice in auditing. In addition, the

Ethics Standard Board (ESB) was dissolved. In 2004, three of its key boards –

Auditing Practices Board (APB), Investigation and Discipline Board (IDB) and

14

Review Board – were transferred under the FRC to accommodate the new

regulatory structure (see Figure 1.1).

Figure 1.1: The Structure of Audit Regulation

Adapted from Turley (2008)

Under the new structure, various operating boards were set up to oversee different

aspects of regulatory responsibility. The new structure aimed to strengthen the

audit profession, provide an effective system of auditing regulation and raise the

standards of corporate governance. One of the most significant impacts of the new

structure was to end self-regulation by the profession in favour of independent

oversight and regulation of the profession within the FRC (Turley, 2008, p.210).

In December 2004, the APB introduced the International Standards on Auditing

(ISAs) (UK and Ireland) based on the International Standards of Auditing (ISAs)

issued by the International Auditing and Assurance Standards Board (IAASB). The

APB also issued Ethical Standards on the auditor‘s integrity, objectivity and

independence that to be applied with ethical codes issued by the accountancy

bodies. In October 2009 same changes were made in the ISAs (UK and Ireland)

that are effective for audit for audits of financial statements for period endings on,

or after, 15 December 2010.

Board

Audit Inspection

Unit

Accounting Standards

Board

Financial Reporting Review Panel

Auditing Practices

Board

Professional Oversight

Board for

Accountancy (now known as

Professional Oversight

Board)

Accountancy Investigation

and Discipline

Board

Committee on

Corporate Governance

Financial Reporting Council

Operating bodies

Board for Actuarial Standards

15

In 2006, the Revised Eighth Company Law Directive on Statutory Audit was

adopted by the Council of the European Union thereby driving another development

in the auditing regime in the UK. Some of the key changes include requirements for

audit firms to publish an annual transparency report and disclose information

concerning the legal and ownership structure, internal quality control system and

audit fees (Humphrey and Moizer, 2008). The adoption has also put emphasis on

the importance of communication between the external auditors and the AC. The

members‘ states are also required to establish independent public oversight boards

that are responsible for, among other things, monitoring the audit firm‘s compliance

with the applicable regulatory framework and audit quality. The most significant

change that happened during this time was the establishment of the Audit

Inspection Unit (AIU), which is part of the Professional Oversight Board (POB) with

responsibility for the inspection of public interest audits and publication of the

results of the inspections (more discussion about the AIU is available in section

2.3). The new regulatory framework has thus set new criteria for and placed new

conditions on audit practice (Humphrey et al., 2007a).

The UK government has also undertaken a review that has led to the revision of the

Companies Act 1985. In consequence, the Companies Act 2006 was issued and a

number of changes were made. For example, the Act allows audit firms to limit

their liability and establishes a criminal offence when a misleading audit report is

issued. The Act also enhances the transparency of the audit process by requiring

the name of the individual audit partners signing audit reports to be identified and

increases the quality of information available regarding auditor resignations.

On the corporate reporting front, International Financial Reporting Standards

(IFRSs) were introduced for financial statements of listed companies for the period

beginning on or after 1 January 2005. Listed companies were required to disclose

more information in addition to the audited financial statements (such as a

Directors‘ Remuneration Report, Directors‘ Report and Statement of Compliance

with the UK Corporate Governance Code), with consequent implications for the role

of the external auditors who are now required to verify that information. Some

accounting standards in the IFRSs require the use of fair value measurement, which

requires a greater use of judgement (both by management and auditor) in the

preparation and audit of financial statements (FRC, 2006b).

In concluding this brief outline on the regulatory framework in the UK, it is

observed that significant changes have been made to the auditing regime as a

specific response to the corporate collapses and auditing scandals. These

16

developments offer an interesting background to the subject of the thesis. Audit

quality as the subject of the thesis will be briefly introduced in the next section.

1.2 Audit Quality

To understand company audits, it is helpful first to understand its rationale and the

role played by the external auditors. Company audits exist because of a separation

between the ownership and the control of companies in the modern economy where

shareholders or owners have given resources to managers with the direction of

maximising their wealth. Nonetheless, it is argued that opportunistic managers

have a propensity for not reporting the true state of the performance of the

company, which could result in residual loss to the owners. Therefore, the role of

the auditors is to reduce agency costs because of information asymmetry and

competing interests between the two parties. For this reason, agency theory, which

concerns the control and information asymmetry between the shareholders and

managers, is normally used theoretically to legitimate the reason why company

audit is important in the modern economy (Jensen and Meckling, 1976; Arnold and

de Lange, 2004).

From the economic perspective, audit services are about reducing agency costs

through the verification of financial statements by an independent auditor. The

verification process involves the accumulation and evaluation of evidence, which

later becomes a basis for the auditors to form their professional opinion or

judgement on the financial statements. The result of the process, the audit opinion

that is stated in the audit report, is believed to enhance the credibility and quality

of the financial statements. It can be argued that the value of the audit services

depends on the form of opinion issued by the auditors. In consequence, the value

of the audit opinion depends on the quality of audit work carried out by the auditors

(Moizer, 2005). Audit quality is important because it will affect the credibility and

reliability of the audit opinion. If the auditors perform a poor audit, the opinion

rendered about the audited financial statements could be misleading, and this

would definitely affect the users‘ economic decisions. In this discourse, audit quality

is thought to protect the economic interest of the owners and other interested

parties by enhancing the value of the financial statements prepared by the

managers.

Concerns about audit quality and the factors that influence quality have been

longstanding subjects of interest in academic, practitioner and regulatory debates

about auditing. The objective of enhancing audit quality underlies standard setting

17

activities and doubts about the quality of audit have motivated investigations and

other actions by regulators (see for example, Panel on Audit Effectiveness, 2000;

FRC, 2006b and 2008). In like manner, academic research has examined the links

between various factors and the possibility of quality differentiation between audit

firms. Much of the research literature investigating audit quality relies on the

definition proposed by DeAngelo (1981a), that audit quality is the market-assessed

joint probability that a given auditor will both: (i) identify a breach in the client

company‘s accounting system and (ii) report that breach, that is, that the auditor

has both the technical competence to detect any material errors during the audit

process, and the independence to ensure that material errors and omissions are

corrected or disclosed in the auditor‘s report. Following DeAngelo, who also argued

that because evaluating audit quality is costly, less costly surrogates or proxies

such as firm size and reputation will be used as indicators of audit quality, research

studies have frequently employed surrogates to test the effects of the

independence and competence of the auditors. Although mixed results have been

reported, prior research has showed that factors such as industry expertise, the

amount of non-audit services, tenure and size of the audit firm may be associated

with variations in audit quality (details about studies related to audit quality are

presented in Chapter 2).

Notwithstanding the important contribution of archival and other studies which,

following a rationalist economics perspective, have looked for systematic evidence

that audit quality is influential in audit contracts, some have argued that this

approach neglects the wider social, political and historical contexts of auditing

(Power, 1996; Humphrey, 2008). The dominance of a functionalist or positivist

approach may constrain our understanding of actual auditing practices (Dirsmith et

al., 1985). As a result, the importance of the social and institutional dimensions of

auditing has increasingly been recognised and incorporated into research studies

(Humphrey and Moizer, 1990; Carpenter and Dirsmith, 1993; Curtis and Turley,

2007; Hudaib and Haniffa, 2009). Despite the development of studies that place

greater emphasis on understanding audit practice in its context, so far little

attention has been given to exploring how the meaning of the concept of audit

quality is constructed in practice in the context of the institutional and social

environment of the audit setting. Specifically, little evidence is available about how

audit practitioners translate the general concept of audit quality into behaviour that

affects the actual conduct of the audit in practice, that is, what audit quality means

to those who carry out audit engagements. Likewise, limited evidence is available

about AC members and quality inspectors understanding of the term of audit

18

quality or how AC members and quality inspectors, who have oversight

responsibilities for auditing and financial reporting, assess the quality of the work

performed by external auditors. These issues are essentially the subject of this

thesis, which aims, through documentary analysis, semi-structured interviews and

a survey questionnaire to enhance understanding concerning the meaning of audit

quality in practice.

1.3 Research Questions and Research Approach

The main objective of this study is to understand the meaning of audit quality in

practice. The first research question seeks to advance the understanding of the

concept of audit quality from the perspectives of those who deliver the audit

services, that is the audit partners, and those who are responsible for

commissioning and monitoring the audit services, that is the AC members and

quality inspectors:

Research question 1: How is the concept of audit quality understood and applied by

key participants in the audit process?

This study approaches auditing practice as not only a technical activity but also a

socially constructed activity. Perceptions and beliefs about audit quality are seen as

emerging from a complex series of interactions between various constituents in the

auditing environment, influenced by regulatory, societal and economic factors in the

auditing environment. The study also concerns the representations of the meaning

of audit quality in practice, that is, to understand how various symbols (words,

objects and acts) are used to represent the meaning of audit quality. Hence, the

study attempts to answer the following research questions:

Research question 2: What are the factors that influence the construction of the

meaning of audit quality in practice?

Research question 3: How is the meaning of audit quality represented in practice?

The final set of questions aims to enhance knowledge about the impact of auditing

and governance reforms on audit quality. Two further sets of more specific

questions are developed to support investigations into this issue.

Research question 4: What is the impact of the AIU on audit quality?

Research question 5: What is the impact of the AC on audit quality?

19

An analytical framework, which has been developed based on symbolic

interactionism, is used to address these research questions. The framework

facilitates the development of an understanding of the social meaning of audit

quality in its institutional and social context. Semi-structured interviews are

employed as the main research method because this allows for in-depth,

contextualised study, which is appropriate to address the research questions. A

survey questionnaire and archive documents from the public domain including the

FRC Discussion Paper and the AIU Annual Inspection Reports are also examined to

provide additional evidence from which to address the research questions.

1.4 The Justification and Importance of the Study

As reported earlier, the objective of this thesis is to revisit the meaning of the

concept of audit quality and to understand the representation of that meaning in

practice. It also investigates the influence of internal and external factors in the

audit environment on the construction of the meaning. The motivation for

undertaking this study is because there has been no extensive in-depth research

that simultaneously explores the practical meaning of audit quality from the

perspectives of the audit partners, AC members and quality inspectors. There is

also limited in-depth investigation that explores the influence of a range of

contextual factors in the auditing setting that may influence the perceptions of audit

quality held by audit partners, AC members and quality inspectors. The current

auditing and governance environments also provide an interesting context in which

to study the issue of audit quality. The importance of the study can be summarised

as follows:

1) It adds to and extends the existing body of knowledge on audit quality

literature, in particular by providing evidence drawn from audit practice in the

UK and by employing the interpretive approach rather than the mainstream or

functionalist approach.

2) It will furnish further insights into prevailing factors that affect audit practices

and concept of audit quality.

3) It will help regulators, corporate managers, society, practitioners, and

academicians to gain a better understanding of the nature and factors that

might affect audit quality.

4) It will empirically inform the debate surrounding the potential benefits of

direct regulation of audit practices to promote a high quality of audit.

5) It will assist in comprehending the role of the AC members in promoting high

quality auditing.

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1.5 Structure of the Thesis

This section shows the organisation of the thesis. Chapter 2 reviews the literature

and other documentary records that are relevant to the notion of audit quality. This

then leads to a discussion and the identification of gaps in the analysis of the

literature, that is, the lack of research examining the meaning of audit quality

within the institutional and organisational context of audit practice.

Chapter 3 outlines both the theoretical framework and research design employed in

this study. Symbolic interactionism is presented, which provides a framework for

the analysis and understanding of the empirical work in the study. This provides a

basis to consider the complex interaction between auditors and other audit market

constituents and environmental factors that influence the meaning of audit quality

in practice. This chapter also describes the interpretive research approach that

underpins the research methodology, which guides the research design for the

study.

Chapter 4 presents the findings of the first stage of the study, which describes

views about audit quality expressed in responses of interested parties on the

discussion paper, entitled ‗Promoting Audit Quality‘ issued by the FRC in 2006. An

analysis of the key issues raised by respondents is presented and becomes the

basis for further investigation in the second stage of study, which involves semi-

structured interviews and a survey questionnaire.

The subsequent three chapters discuss the empirical work of the second stage of

the study. The chapters explain the findings regarding the conception of the

meaning of audit quality, factors influencing construction of that meaning and the

representation of audit quality in practice. Evidence collected from audit partners,

AC members and quality inspectors is presented in Chapters 5, 6 and 7

respectively. The potential impact of the role of the AC members and quality

inspectors to audit quality are also discussed.

Finally, Chapter 8 provides the conclusion of the empirical work of the study.

Critical issues with regard to perceptions of audit quality in the organisational and

social context in which auditing is conducted are highlighted. This chapter concludes

the thesis by considering the contributions and limitations of the study and by

making suggestions for future research.

21

Chapter 2

Perspectives on Audit Quality

2.0 Introduction

The previous chapter presented a brief overview of research relating to audit

quality. It introduced the research area and discussed the background to the

research problem. The purpose of this chapter is to review a number of major

approaches to researching audit quality that have been applied or areas of research

that are relevant to audit quality. The literature on inputs and outcomes related to

audit quality, audit process, perceptions of audit quality and audit quality in an

organisational and social context are evaluated. The evaluation of research

concerning inputs and outcomes related to audit quality, audit process and

perceptions of audit quality contribute to our current understanding regarding the

concepts and definitions of audit quality, factors or situations that affect audit

quality in practice, and the perceptions of various participants in the auditing

environment concerning audit quality. Evidence shows limited evaluations of the

concept and definition of audit quality from those involved (such as audit

practitioners, AC members and audit quality inspectors) in the audit process.

Evaluation of studies of auditing practice in its organisational and social context has

contributed to our understanding concerning the relationship between the audit

practice and notion of audit quality, which highlights the issues of legitimacy, image

management and conflicts in practice. Evidence reveals that limited studies appear

to have addressed wider organisational and institutional dimensions in investigating

the concept of audit quality in practice.

This chapter also reviews other documents and publications relevant to audit

quality that are primarily drawn from the arena of regulatory policy on auditing. It

examines practitioner and regulatory conception of audit quality. The purpose is to

develop an understanding of the multiple perspectives ascribed to audit quality and

provide a broader viewpoint of the various debates that affect this investigation.

The literature on ACs in association with audit quality and documents relevant to AC

are also reviewed, which contribute to our understanding about their roles,

operations and effects. The review shows that the responsibility of ACs for

overseeing audit quality appears to be expanding as a result of the changes in the

corporate governance framework. Evidence concerning their effects on the external

audit function is evaluated recognising that there is limited understanding regarding

22

the processes associated with the operation or activity of ACs and the manner in

which they influence audit quality in practice.

The remainder of this chapter is structured as follows. Section 2.1 reviews research

studies that are relevant to audit quality and a number of themes under this topic

are considered. In particular, it draws attention to the limits of the conventional

vision of audit quality and related research approaches and to the socially

constructed nature of audit practices, thus highlighting the need for research in

understanding audit quality within its organisational and social context. This part of

the chapter will argue that this approach to auditing research may have the

potential to illustrate some additional and different aspects of audit quality in

practice. Section 2.2 reviews professional perspectives of audit quality and section

2.3 reviews regulatory perspectives of audit quality, both of which perspectives

recognise broader aspects of audit quality. Section 2.4 evaluates prior literature on

ACs that examines the AC process and its impact on audit quality. Section 2.5

discusses the implications of the review for the current study. This forms the basis

for formulation of the research questions and developing the research objectives of

the thesis. Finally, section 2.6 provides a summary of the chapter.

2.1 Research Approaches to Audit Quality

The concept of audit quality has proved difficult to define with certainty. It is not

immediately or directly observable and is difficult to measure (Power, 1997).

Moreover, audit markets‘ participants have conflicting roles and different

expectations that lead to different interpretations of audit quality (Sutton, 1993).

As a result, different people tend to have different definitions and ways of

measuring it (Rasmussen and Jensen, 1998; Watkins et al., 2004), which suggests

ambiguity and subjectivity in the term audit quality, as recognised by the FRC:

“There is no single agreed definition of audit quality that can be used as a

„standard‟ against which actual performance can be assessed” (FRC, 2006b,

p. 16).

The regulator in the UK and professional practitioners have never defined the term

precisely although various initiatives have been built around the term and serve to

influence contemporary understandings of such concepts (both practitioner and

regulatory perspectives on audit quality are discussed in section 2.2 and 2.3,

respectively). The professional literature is inclined to define audit quality in relation

to meeting the requirements of the auditing standards during the course of the

audit (Krishnan and Schauer, 2001; McConnell and Banks, 1998). In comparison,

23

various academic research approaches that are relevant to audit quality (see Figure

2.1) have defined and measured audit quality in a number of ways, involving a

combination of measures linked to audit outcomes, such as audit failures (Feroz et

al., 1991) and the quality of financial reporting (Becker et al., 1998; Gul et al.,

2003), process measures that are related to auditor performance (Sutton, 1993;

Malone and Roberts, 1996), and to capture quality attributes of relevance to users

and preparers of financial statements (Schroeder, 1986; Carcello et al., 1992; Duff,

2009). One research approach takes into account the influence of the organisational

and social context of auditing practice. This line of research questions the influence

of people, processes and the audit environment such as the role of regulation, AC

members, audit clients and professional bodies to audit practice. This thesis

essentially adopts this approach as a basis for the research. In the remaining part

of the section, various approaches to audit quality are discussed.

Figure 2.1: Aspects to Audit Quality

2.1.1 Research Approaches derived from DeAngelo’s Definition of Audit Quality

A significant body of literature dealing specifically with audit quality has developed

from DeAngelo‘s (1981a; 1981b) studies of independence and the competence of

auditors of large audit firms. Much of the research literature investigating audit

quality relies on the economic view represented in the definition proposed by

DeAngelo (1981a, p. 186) – that audit quality is the market-assessed joint

Aspects to Audit Quality

Process

1. Audit procedures 2. Judgement and

decision making 3. Quality threatening behaviour

Inputs and Outcomes Related to Audit Quality

Inputs to audit quality: 1. Audit firm‘s characteristics

2. Auditor‘s characteristics Outcomes related to audit quality: 1. Financial Reporting Quality 2. Cases analysis

Perception

1. Users and preparers

2. Audit expectation gap

Audit quality

in an organisational

and social context

24

probability that a given auditor will both (i) 'identify a breach in the client

company‘s accounting system‘ and (ii) ‗report that breach‘ – that is, the auditor has

both the technical competence to detect any material errors during the audit

process, and the independence to ensure material errors and omissions are

corrected or disclosed in the auditor‘s report. Thus, audit quality is connected to

both the actuality and the perceptions of two important determinants of audit

quality: competence and independence. Following DeAngelo, who argued that

assessing audit quality is costly because of the limited ability of the consumers to

observe audit procedures used in an audit engagement and the limited information

about incentives within the auditor-client contract, she proposed the use of auditor

size as a surrogate for auditor quality. She also argued that the larger audit firms

are of better quality compared to other auditors because they have less economic

reliance on any single client. Moreover, incentives for larger audit firms to reduce

audit quality will be lower because of the economic importance of maintaining

reputation (larger audit firms with greater numbers of audit clients may have ‗more

to lose‘ if they fail to detect and report material errors and omissions).


A number of strands of research that are largely built on DeAngelo‘s definition of

audit quality can be recognised and these are summarised in Figure 2.2. The main

theme of research in this area involves the consideration of the relationship

between measures of ‗output‘ quality (such as quality of earnings and regulatory

sanctions) and various ‗input‘ related variables (such as audit firm size, audit fees

and audit tenure).

Figure 2.2: Inputs and Outcomes Related to Audit Quality


Inputs Factors Which May Influence Audit

Quality

Characteristics of audit firm: 1. Size 2. Audit fees 3. Non-audit services 4. Audit tenure

Characteristics of auditors:

1. Professional attributes 2. Professional values

Outcomes Related to Audit Quality

Financial Reporting Quality: 1. Quality of earnings 2. Accurate financial information 3. Restatements of Financial

Statements 4. Accurate audit opinion

5. Regulatory sanctions Audit Failure Cases: 1. Litigation

25

Failure to deliver adequate output quality has been inferred from sources such as

auditor litigation (Palmrose, 1988) and the imposition of regulatory sanctions (Feroz

et al., 1991). Financial reporting quality has been linked to the auditor‘s ability to

improve the credibility of earnings (Becker et al., 1998; Gul et al., 2003), the

accuracy of the audit opinion (Ruiz-Barbadillo et al., 2004), the probability that the

auditor will not issue an unqualified opinion for financial statements containing

material misstatements (Lee at al., 1999), and the accuracy of the information

reported by the auditor (Davidson and Neu, 1993). Input factors that have

commonly been tested for evidence of an association with variation in these

outcomes include the size of the audit firm, audit fees (as an indicator of audit

effort), whether the firm is a specialist in the industry and whether the degree of

auditor independence is threatened by the presence of fees from non-audit services

and long audit tenure. Although mixed results have been reported, prior research

has recognised audit fees, the amount of non-audit services and audit tenure as

input factors that may be associated with variations in audit quality

Audit firm size has been the most commonly studied surrogate for audit quality. It

is argued that the larger audit firms are higher quality than the smaller firms for

various reasons. First, larger firms are able to hire highly skilled employees because

of their reputation. In addition, the larger firms are also able to provide rigorous

training for their staff, which contributes to the development of the skills and

knowledge of the auditors. Second, it is also argued that more developed and

structured audit approach or methodology applied by the larger firms increases

their ability to issue accurate audit opinions through greater detection of errors and

omissions (Carcello et al., 1995). However, other studies provide limited evidence

on the association between the structured audit approaches and the type of

opinions rendered (Mutchler and William, 1990).

One of the most common approaches that have been widely investigated in this

area is the association between audit firm size and various attributes associated

with the quality of financial reporting. Researchers hypothesize that the clients of

big size audit firms report more accurate financial information and less earnings

management. Large audit firms, such as the Big Four, are argued to be more likely

to issue a more accurate opinion and their audit clients to experience fewer

restatements of financial statements and be subject to fewer regulatory sanctions

(Feroz, 1991).

26

Big size firms are said to be more conservative in reporting because they have

more incentives to reduce litigation loss in order to maintain their professional

reputation and independence (DeAngelo, 1981a; DeFond et al., 2002) and are less

likely to be economically dependent on a single client (Pearson, 1980). In this

context, it is predicted that a higher quality auditor is more likely to control

inappropriate behaviour of the client‘s management and, thus, more likely to

control earnings manipulation and ensure accurate financial information is issued.

Using archival data, some results support the hypothesis that big size auditors are

associated with a lower incidence of earnings management (Becker et al., 1998:

Kim et al., 2003). Similarly, a few published studies show that reported earnings

forecasts of companies audited by big size auditors are more accurate than non-big

size auditors, implying more accurate financial information (Chen, Lin and Zhou,

2005; Lee et al., 2006). In contrast, some studies find no significant difference in

the reported discretionary accruals of clients audited by the differing size of firms

(Jeong and Rho, 2004; Caneghem; 2004; Maijoor and Vanstraelen, 2006).

Kim et al. (2003) concluded that big size audit firms have more incentive to deter

aggressive earnings management when: i) there is a conflict or convergence of

reporting incentives (income-increasing accounting choices) between corporate

managers and external auditors; and ii) there is high litigation risk for failure to

detect income overstatement. They argued that when auditors face these two

situations auditors of the big size audit firms exercise a high degree of professional

scepticism to restrict the aggressive behaviour of corporate managers compared to

the smaller firms.

Using archival data from firms listed on the Korea Stock Exchange from year 1994

to 1998, Jeong and Rho (2004) found no significant difference in the reported

discretionary accruals of companies audited by either the then Big Six or non-Big

Six auditors. This finding is also consistent for companies that switch from non-Big

Six to Big Six auditors and vice versa. The results show that there is no quality

differentiation between different sizes of audit firms in Korea. In addition, the size

of audit firms does not influence variation in the quality of financial reporting (in

terms of reported discretionary accruals). Similarly, Caneghem (2004) found a

negative association between the size of audit firms and the financial reporting

quality based on a sample of listed companies in the UK. He concluded that the

relationship between audit quality and the financial reporting quality are rather

inconclusive because of weak support for audit firm size ability to restrict earnings

management.

27

Maijoor and Vanstraelen (2006) undertook a comparative study to investigate the

issue of earnings management in a European context. They examined the effects of

national audit environment, audit firm quality (using proxy of audit firm size) and

reliance on international capital markets on earnings management activities. Using

data from firms in France, Germany and the UK, they discovered that the

magnitude of earnings management practices varies across the three countries.

Their study found three important findings. First, stricter national audit

environments play a significant role in constraining earnings management activities

regardless of the size of the audit firms between the three countries. Second, the

influence of big size audit firms on earnings management activities only exists in

the UK because of a stricter investor protection environment but not in France or

Germany. Finally, firms that rely on international capital markets are associated

with a higher level of accruals, which implies that NYSE listing does not deter

earnings management. Overall, they concluded that monitoring strength by big size

auditors on discretionary accruals is not uniform across the three countries.

A few published studies have used earnings forecasts during the initial public

offering (IPO) to investigate the relationship between proxies of audit quality and

the financial reporting quality. Chen, Lin and Zhou (2005) provided evidence that

suggests that big size and specialist auditors are associated with high quality

financial reporting. Using data of Taiwan IPO firms, analysis reveals that the clients

of the Big Five auditors reported less unexpected accruals. The result implies that

specialist and big size auditors are able to mitigate earnings management, and,

thus, contribute to more accurate financial information.

Lee et al. (2006) carried out a study to evaluate the relationship between the size

of audit firms on both the accuracy and conservatism of audited earnings forecasts

provided in the Australian IPO prospectuses. Using a sample of 215 firms, from

year 1991 to 1998, they found that earnings forecasts reported and audited by the

then Big Six firms are more accurate than smaller firms. They found that big size

auditors are more conservative on reported earnings forecasts, which indicates a

high quality of financial reporting.

Prior research shows that larger audit firms receive larger audit fees compared to

smaller firms. It is argued that larger audit fees reflect high audit quality through

greater audit effort, which influences the ability of the auditors to detect material

misstatements (Elitzur and Falk, 1996) and constrain earnings management

(Caramanis and Lennox, 2008). In a similar manner, the additional premium

associated with larger audit fees is believed to be related to specialised knowledge

28

of a particular audit firm that contributes to high audit quality (Palmrose, 1986;

Balachandran and Simon, 1994). The larger audit firms with greater clientele within

the same industry are believed to have in-depth understanding of the nature of

business and risks in that particular industry. Nonetheless, the evidence is mixed

and several studies have been unsuccessful in identifying an association between

audit fees and auditor effort that are associated with higher audit quality (Dye,

1993; Hoitash et al., 2007). Moreover, the premium on audit fees might be

attributed to brand name value or at least the perception of higher quality audit

rather than expertise relating to their industry specialisation.

A study by Caramanis and Lennox (2008) examined the effects of audit effort

(using proxy of audit hours worked) on quality of earnings. Using analysis from a

database of hours worked by auditors on 9,738 audits in Greece between year 1994

and 2002, their study showed that lower audit hours are associated with positive

and larger abnormal accruals. In addition, when an audit effort is low managers are

more aggressive in managing earnings in order to meet or beat the earnings

benchmark. Their findings also showed a significant negative relationship between

audit hours and income-increasing earnings management for Big Five firms, which

means that big size auditors exert more audit effort (work longer hour) and are

able to monitor aggressive earnings management. They concluded that lower audit

effort gives an opportunity for managers to aggressively manage their reported

earnings.

Some studies have examined the impact of non-audit fees on the competence and

independence of auditors. This area of research concerns whether the provision of

non-audit services would impair auditors‘ independence through economic

dependence on a client because of large fees unrelated to the audit. The research

also concerns whether the provision of non-audit services will lead to higher audit

quality as a result of ‗knowledge spillover‘ or whether auditors gain greater

understanding of the client and their business processes because of additional

services. In general, past research has documented inconsistent results concerning

the association between high non-audit service fees and erosion of auditor

independence that reduces audit quality (Frankel et al., 2002; Kinney et al., 2004).

In similar manner, prior research has shown mixed results concerning the potential

beneficial impact of non-audit services on audit quality (Simunic, 1984; Wu, 2006).

Beyond the focus on auditor size, some studies have examined the impact of

auditor tenure (Ghosh and Moon, 2005; Stanley and DeZoort, 2007; Manry et al.,

2008), and audit and non-audit fees (Frankel et al., 2002; Gul et al., 2006; Lim and

29

Tan, 2008) on financial reporting quality. There are two main competing opinions in

relation to the impact of audit tenure on audit quality. First, some researchers posit

that long audit tenure is related to high audit quality through the auditors‘

enhanced ability to detect misstatements and errors because of the greater

understanding of the client‘s business and processes (Johnson et al., 2002; Manry

et al., 2008). It is argued that longer audit tenure and the provision of non-audit

services would increase audit quality because of the increased knowledge of specific

audit clients that is negatively related to the likelihood of financial restatements.

While, others assert that long tenure could reduce audit quality for the reasons of

complacency or less rigorous audit procedures that reduce auditors‘ capacity to

detect errors and misstatements (Shockley, 1982; Deis and Giroux, 1992). Some

researchers argue that longer audit tenure and high provision of non-audit services

would impair auditor independence and, consequently, reduce the propensity of the

auditors to issue an accurate audit opinion.

Ghosh and Moon (2005) employed a market-based approach and evaluated the

impact of auditor tenure on perceptions of financial statement users concerning the

quality of earnings. Specifically, they investigated the perceptions of investors,

independent rating agencies, and financial analysts on the impact of auditor tenure

on earnings response coefficients from returns-earnings regressions (as a proxy for

earnings quality). They found that the investors and financial analysts perceived

that longer audit tenure could enhance audit quality. In contrast, the independent

rating agencies perceived the unfavourable impact of auditor tenure on earnings

quality.

Using non-audit services as a proxy of audit quality, Gul et al. (2006) hypothesized

that there is an inverse relationship between non-audit services provided by a

firm‘s auditor and the earnings quality (measured as the earnings response

coefficient) and this relationship is weaker for firms audited by Big Six auditors.

Using archival data, from 840 firm-year observations of Australian companies, they

found support for the hypothesis; earnings response coefficient is negatively

associated with non-audit services as indicated by a negative and significant

coefficient on the earnings. The results imply that investors perceived non-audit

services affect the credibility of financial statements, but the adverse perception will

be less profound if the financial statements have been audited by Big Six auditors.

30

In general, prior research has documented mixed results on the relationship

between audit tenure and audit quality. Again, the evidence of the linkage between

the surrogates of audit quality and financial reporting quality provides inconsistent

results.

Academic researchers have also investigated audit quality from the analysis of audit

failure cases. It is expected that higher audit quality is reflected through less

litigation as a consequence of audit failures through auditors‘ ability to detect and

report material misstatements. For example, Palmrose (1988) examined 472

sample of legal cases related to audit-related litigation against Big Eight and non-

Big Eight firms in the US from 1960 through 1985. She found that big size audit

firms were associated with less incidence of litigation than other types of audit firm.

There are also some studies that employ a case study observation to examine the

content of an individual case of a company or audit firm in detail (Erickson et al.,

2000; Fuerman, 2004). For example, Erickson et al. (2000) examined detailed legal

documents (audit working papers and auditor deposition testimony of auditors) of

audit failure of Lincoln Savings and Loan (LSL) in the US. They concluded that lack

of knowledge and understanding of auditors in LSL‘s business and operations

contributed to a deficiency in audit procedures, and, consequently, led to audit

failure.

Literature on individual auditors tends to focus on the impact of auditor‘s

professionalism on audit performance. Catanach and Walker (1999) suggest that

audit quality is a function of auditor performance that can be classified into two

main aspects. First, the professional ability that is related to auditors‘ ability to

detect material misstatements and omissions of accounting matters that depends

on auditor‘s professional attributes such as technical competence, knowledge,

experience, industry specialisation and technological proficiency. These professional

attributes are acquired by way of advanced education, training and experience,

which characterise auditors as members of a profession (Burns and Haga, 1977). In

a similar manner, the Auditors‘ Code (APB, 2004b) requires that auditors act with

professional skill, which is derived from their qualification, training and practical

experience. In this case, auditors are required to have in-depth understanding of

financial reporting and business issues, together with expertise in accumulating and

assessing the evidence necessary to form an audit opinion. Empirical research, such

as the experimental study by Owhoso et al. (2002), suggests that auditors with

specialist knowledge are better able to detect both mechanical and conceptual

errors in the financial statements. Similarly, an earlier experimental study by

Solomon et al. (1999) provides evidence that auditors‘ specialist knowledge

31

deriving from training and direct experiences influences their ability to detect errors

in the financial statements.

Second, audit quality is connected to professional conduct, which embraces

attributes that may include independence, integrity, objectivity and due

professional care (ISA 200 UK and Ireland; Catanach and Walker, 1999). The

conceptual framework issued by the IFAC (2005) defines independence as

comprising two main aspects. First, independence is an attitude of mind that relates

to auditors acting with integrity and exercising objectivity and professional

scepticism in his/her professional work. Second, independence in appearance

concerns the public perception of potential conflicts of interest that compromise

independence in mind. This aspect of professionalism is important for the auditor to

report impartial audit opinions by way of resisting client management pressure and

being aware of what is right and what is wrong in his/her professional conduct (The

Auditors‘ Code). Independence is also important for the audit profession because it

is related to the credibility of the audit opinion and the financial statements.

Suddaby et al. (2009) suggest that auditor independence has long been claimed as

a core professional value by the auditing profession, which governs their

performance and behaviours that demonstrate audit quality.

Overall, much of the research in the area of audit outcomes has used a market

based data and tests the association between certain proxies of audit quality and

the related outcome such as the quality of financial reporting (for example the

extent of earnings management) and case analysis. In general, the research has

been conducted under the implicit assumption that the proxies of audit quality,

particularly audit firm size, equate to high audit quality, but has yielded mixed

results. Nonetheless, the collapse of Arthur Andersen and the banking crisis in

recent years suggest the need to revisit this assumption. This potentially highlights

the limited usefulness of audit firm size as a proxy of audit quality, as indicated by

the FRC and AICPA – that there is no quality differentiation between the sizes of the

audit firm. Despite the contribution of this area of research in enhancing our

understanding of audit quality from the perspective of the correlation between the

proxies of audit quality and financial statements properties (such as abnormal

accruals), it provides limited information about audit practices that contribute to

high audit quality. This suggests the need for additional research beyond the

association between the proxies of audit quality and related outcomes. The next

section discusses other research approaches that relevant to audit quality.

32

2.1.2 The Audit Process and Audit Quality

Prior literature on the audit process that is relevant to understanding audit quality

can be categorised into three main fields of enquiry: first, research on audit

procedures as a representation of what auditors do, second, studies of the nature of

auditors‘ judgement and decision making and third, investigation of the prevalence

of behaviours which may threaten or undermine audit quality. These are shown in

Figure 2.3 and discussed briefly next.

Figure 2.3: The Audit Process and Audit Quality

Audit Procedures

Turley (1985) classifies two broad areas in researching audit process: studies of

audit procedures and studies of auditor judgement. Studies of audit procedures

include descriptive studies about audit methods used in practice, studies evaluating

methods, decision aids and other tools used in practice and studies which aim to

develop or test new techniques (Curtis, 2006). Cushing and Lobbecke (1986)

examined materials (such as audit manuals, monographs, training materials,

questionnaires and checklist) of 12 large firms in the US, which showed the

existence of differences in ‗structure‘ between the firms. They suggested that firms

with structured audit approaches have: ―a systematic approach to auditing

characterised by a prescribed, logical sequence of procedures, decisions, and

documentation steps, and by comprehensive and integrated set of audit policies

and tools designed to assist the auditor in conducting the audit‖ (pg. 32). This

study contributed to the identification and classification of audit methodologies used

in practice as structured, semi-structured, partially structured and unstructured

(Curtis, 2006).

Approaches to Researching the Audit Process

Audit procedures

Quality threatening behaviour

Judgement and decision

making

33

Different audit approaches are argued to have different effects on audit

performance. Bowrin (1998) reviewed the literature concerning audit structure and

identified the positive impacts of structured approaches on audit effectiveness,

audit efficiency and the audit firm‘s litigation threat, improvement in consensus of

auditor judgements and the accuracy of audit decisions. Nonetheless, prior

literature has produced mixed findings about the relationship between audit

structure and its potential benefit on various aspects of audit performance

(Bamber& Snowball, 1988; Morris & Nichols, 1988; Mutchler and Williams, 1990;

Icerman and Hillison, 1991). For example, Bamber and Snowball (1988) conducted

a field experiment with 113 audit seniors and examined the impact of different

audit structure (structured vs. unstructured) on the consensus of auditor

judgements and auditors‘ use of coordination and control mechanisms in their audit

performance. They found limited impact of a structured audit approach to

judgement consensus but auditors from structured firms use greater coordination

and control mechanism (such as consultations with peers or audit managers) when

faced with greater uncertainty in the conduct of the audit compared to auditors

from unstructured firms.

Mutchler and Williams (1990) studied the relationship between audit technology

and audit firms going concern opinion. They found that client risk profiles rather

than audit technology had greater influence on auditor judgement. Morris and

Nichols (1988) provided evidence of a positive association between a structured

audit approach with auditor judgement consensus on materiality decisions based on

the examination of information (interest capitalization decisions) in published

annual reports. Chow et al. (2006) found evidence of differences in structure of the

audit process between Big Four firms and national firms in China. They suggested

that differences in the structure of the audit process may potentially contribute to

variability and inconsistency in audit performance across auditors and audit

engagements.

In an experimental study, Bamber and Ramsay (2000) evaluated the impact of

auditors‘ specialization on workpaper review process performance. They found that

auditors‘ specialization did not facilitate a more efficient review process. Agoglia et

al. (2009) investigated the impact of audit review format on the quality of

reviewers‘ judgements. They found that the reviewer‘s judgements were affected

by the form of review format (face-to-face review vs. electronic review) prepared

by the preparers.

34

Auditor Judgement and Decision Making

Auditor performance is also reflected in the extensive literature on judgement and

decision making in auditing, which focuses on the quality of auditors‘ decisions

(Knechel, 2000). An earlier review of the literature by Libby and Luft (1993)

classified the effects of knowledge, ability, motivation, and environment that

enhance our understanding on potential factors that could affect auditor

performance. Solomon and Trotman‘s (2003) reviewed of this literature identified

the impact of the following topics: multi-person judgement, heuristics and biases,

knowledge and memory, probabilistic judgement, environment and motivation, and

policy capturing on auditors‘ judgement and decision making. Recently, Nelson and

Tang (2005) reviewed this literature and classified the impact of three broad

categories: audit tasks, auditor attributes and the interaction between auditor and

other stakeholders on auditors‘ judgement and task performance.

Meixner and Welker (1988) examined the impact of auditor experience on

judgement consensus. They found that the level of judgement consensus among

participating staff auditors increased with situational and organization experience.

In other words, the length of time that staff auditors had been associated with the

same audit managers and auditor‘s office impacted on the judgement consensus.

Kaplan (1985) investigated the impact of combining the evaluation of internal

control and audit planning judgments on the auditors‘ consensus of the planned

number of audit hours. They found no significant difference in the level of

consensus on audit hours between groups that performed both tasks and groups

that only performed audit planning judgements. An experimental study by Trotman

and Yetton (1985) found evidence that the review process significantly reduced

judgement variance. They did not find a significant difference in performance in the

review process relative to the interacting group (senior and manager) or composite

group (two seniors).

Robertson (2010) found evidence of the influence of audit clients on auditor

judgement. He showed that clients that used ‗ingratiation‘ (a strategic influence

tactic) were able to influence auditors to meet their demand. Trotman et al.‘s

(2005) experimental study, which involved forty-five managers and partners,

examined the impact of intervention methods (role-playing, passive consideration

of the client‘s interests and options, and practice) on the client negotiations process

concerning inventory write-down. They provided evidence of the potential benefits

of the methods on the auditor‘s negotiation ability.

35

In the absence of definitive measures of the quality of audit judgements,

researchers tend to focus on the consistency and consensus of auditor decisions,

that is, whether different auditors faced with similar situations will make the same

decision. Most of the research involves methodology based on experimental

settings for capturing and testing judgement of individual auditors and factors that

may be influential to judgements.

Quality Threatening Behaviour

One line of research related to auditor performance has focused on identifying

factors that would undermine audit quality by way of quality threatening behaviour

(QTB) (see Table 2.1 for more examples of QTB). Literature defines QTB or

dysfunctional behaviour1 as actions that could impair the ability of the auditor to

detect material errors (Kelley and Margheim, 1990). Herrbach (2001) defines

dysfunctional behaviour as actions taken by an auditor during an engagement that

reduce evidence-gathering effectiveness inappropriately. While Malone and Roberts

(1996) define it as the auditors‘ failure to properly execute audit steps.

Table 2.1: List of Specific Quality Threatening Behaviour

Quality Threatening Behaviour

Premature sign off

Reducing the amount of work performed below what auditor would

consider reasonable

Failing to research accounting principles

Making superficial reviews of client documents

Accepting weak client explanations

Bias in sample selection

Reduction in sample size

Reduction in amount of documentation

Failing to research technical issues

Reliance on client work more than appropriate

Four main categories of variables have been identified that could affect auditor

performance – those related to the individual, those related to superiors in the

management of the audit, control systems and contextual variables. Mixed results

have been obtained from studies that have focused on the relationship between the

incidence of QTB and individual variables such as personality characteristics (Kelley

1 Quality threatening behaviour is sometimes described as dysfunctional behaviour or audit quality reduction acts. These terms are used interchangeably.

36

and Margheim, 1990; Malone and Roberts, 1996; Otley and Pierce, 1996a),

professional characteristics (Malone and Roberts, 1996; Otley and Pierce, 1996a;

Lord and DeZoort, 2001), gender (Pierce and Sweeney, 2003), moral development

(Ponemon, 1992; Lord and DeZoort, 2001) and ethics (Lightner et al., 1982).

Previous studies have also examined the association between superior level

variables such as leadership style and the occurrence of QTB (Otley and Pierce,

1995; Pierce and Sweeney, 2004).

For example, Kelly and Margheim (1990) investigated the impact of the

characteristics of the audit senior team (personality traits, structuring behaviour of

audit tasks and consideration towards staff auditor) on the behaviour of the staff

auditors. They examined whether audit senior characteristics moderates the

dysfunctional behaviour of staff auditors caused by time budget pressure in the US.

The findings from eighty-five matched pairs of senior/staff responses of

questionnaires showed high occurrence of QTB (such as premature sign-off audit

report, reduces the amount of work that would be considered appropriate, failure to

research accounting principles and make superficial reviews of client documents) in

practice. The evidence showed limited influence of characteristics of audit senior on

the dysfunctional behaviour of the staff auditors.

The impact of control systems on quality has been examined with respect to

performance evaluation (Sweeney and Pierce, 2004), time deadline and budget

pressure (Lightner et al.,1982; Alderman and Deitrick, 1982; McNair, 1991; Otley

and Pierce, 1996b; Willet and Page, 1996; Kelley et al., 1999; Lee, 2002) and

firms‘ quality control and review procedures (Margheim and Pany, 1986; Malone

and Roberts, 1996; Pierce and Sweeney, 2005). The findings suggest that time

deadline and budget pressures are associated with a high occurrence of QTB but

have reported mixed results for quality control and review procedures.

Public accounting firms are relying on budgets as a form of control mechanism and

performance measurement tool. As a result, the budget has a potential to create

pressure within an audit firm because of its dual function. Previous research has

highlighted ‗the cost-quality dilemma‘ in the public accounting firm because of this

practice (McNair, 1991; Otley and Pierce, 1996). In general, increasing the quality

of the audit may involve investing more time in the audit and may lead to further

costs. In contrast, spending less time would likely affect the quality of auditor

performance in detecting material errors. Previous research has highlighted

difficulties in achieving an appropriate balance between controlling audit cost and

maintaining a high level of audit quality performance. Past studies have shown that

37

auditors sometimes respond to the conflict between cost and quality by engaging in

dysfunctional behaviour, such as premature sign off on audit steps, reducing the

amount of work performed below what the auditor considers reasonable and

accepting weak client explanations (Willet and Page, 1996; Pierce and Sweeney,

2004).

Willett and Page (1996) carried out a survey questionnaire to explore irregular

auditing practices among junior staff auditors in the UK. One-hundred and twelve

(23% response rate) junior auditors responded to the questionnaire. They found

that because of time budget pressure irregular auditing does occur among junior

staff auditors. In comparison, Lee (2002) conducted a case study approach to

investigate the phenomena of irregular auditing in the context of the audit practice

environment in the UK. He conducted in-depth interviews with nine junior auditors

between August 1994 and November 1996. He found that quality reduction acts

normally occur in immaterial areas of audit and when faced with intense time

pressure junior audit staff would use their own time to complete satisfactory audit

tasks. Otley and Pierce (1996b), in a study of audit seniors in Big Six firms in

Ireland found budget pressure had a significant impact on the incidence of quality

threatening behaviour. They also found that a high level of organizational

commitment and effective audit review lead to lower incidence of dysfunctional

behaviour.

Other studies highlight the relationship between QTB and contextual variables such

as audit firm structure (Malone and Roberts, 1996), size of audit firm (Margheim

and Pany, 1986; Malone and Roberts, 1996), motivation (Lightner et al.,1982), the

psychological contract (Herrbach, 2001) and social pressure (Lord and DeZoort,

2001). Collectively this evidence shows there is a significant association between

audit quality, as evidenced by QTB, and contextual variables within and around the

audit firms.

For example, Herrbach (2001) carried out a survey questionnaire with one-hundred

and seventy senior auditors in France. The main objective of this study was to

examine the effects of ‗psychological contract‘ on auditor behaviour. In other

words, this study aimed to investigate how the relationship between the individual

auditor and audit firm affect auditor performance. Factors such as work autonomy,

salary and training are some of the variables that were investigated. He found

limited occurrence of dysfunctional behaviour among the audit seniors. He also

found a negative association between high work autonomy, professional training

and salary and quality reduction acts.

38

Using a survey questionnaire, Malone and Roberts (1996) documented a positive

relationship between effective review procedures and low occurrence of

dysfunctional behaviour among junior and senior level auditors. They also found a

negative association between structured audit approaches with the incidence of

dysfunctional behaviour.

Analysis of this strand of research shows the value of looking at audit quality

beyond simple proxy indicators of auditors‘ competence and independence or

measures of audit quality in relation to inputs and outcomes. The literature

provides some evidence of contextual factors that can influence audit quality.

2.1.3. Perceptions of Audit Quality

Studies on perceptions can be generally divided into two: users‘ and preparers‘

perceptions of audit quality and research on the audit expectations gap. These are

discussed briefly next.

Users’ and Preparers’ Perceptions of Audit Quality

Prior research has investigated users‘ and preparers‘ perceptions of audit quality

and has suggested that preparers, users and auditors view audit quality differently

(Schroeder et al., 1986; Knapp, 1991; Carcello et al., 1992; Behn et al., 1997;

Chen et al., 2001; Duff, 2004). Schroeder et al. (1986) examined AC chairpersons

and audit partners‘ perception on factors that could influence the quality of external

audits. Eighty-one AC chairs and forty-one audit partners responded to their survey

questionnaire. The findings show that audit committee chairs perceive audit team

factors (such as the amount of partner and manager attention to the audit,

planning and conduct of audit team work, and communication between audit team

and management) to be more important than the audit firm factors (such as fees,

peer review, size and reputation) when they assess the audit quality. Furthermore,

the findings reveal a significant difference between audit partners and audit

committee chairpersons‘ perceptions concerning six factors: independence, team

rotation, quality control procedures, auditors‘ technical skills, reputation, and

communication between the audit team and the audit committee.

Another study by Knapp (1991) investigated the impact of auditor size, audit tenure

and general audit strategy on AC members‘ assessment on audit quality. Using an

experimental study of 122 AC members in the US, he found that AC members

perceive that auditor size and auditor tenure significantly influence the quality of

39

audit. However, AC members perceive audit strategy as a less important factor

during the assessment of audit quality.

Carcello et al. (1992) examined financial controllers‘, institutional investors‘ and

audit partners‘ perceptions of audit quality through a questionnaire survey. The

results indicated that all three groups perceive audit team factors as more

important than audit firm factors in enhancing the quality of the audit. Significant

differences were reported between preparers/users and audit partners in relation to

quality factors such as compliance with audit standards, the nature and extent of

non-audit services, quality control standards and professional certification for firm

personnel.

Chen at al. (2001) examined the attributes of audit quality that regulators and

auditors felt enhance or undermine audit quality in China. In general, team and

individual factors such as competence, ethics, and communication between the

audit team and management were rated high as factors that could enhance audit

quality. In contrast, factors such as provision of consulting services, cost-saving

oriented audit firms and audit rotation were perceived as least important in

determining audit quality.

Duff (2004) argued that in addition to the standard definition of audit quality

(independence and competence) other aspects such as client service, empathy,

service quality and responsiveness should be considered as providing a broader

view of audit quality. He carried out a survey questionnaire in 2002 before the

implementation of regulatory changes in the post Enron environment in the UK and

examined the perceptions of audit partners, finance directors and fund managers

concerning the important dimensions of technical quality (reputation, capability,

independence, expertise and experience) and service quality (non-audit services,

responsiveness, empathy and client service) on audit quality. Overall, his study

showed the importance of both technical and service quality dimensions as part of

the larger concept of audit quality as perceived by the three groups.

In a follow up study, in 2005, after the implementation of regulatory changes in the

post Enron environments, Duff (2009) found that all three groups (audit partners,

finance directors and fund managers) rated lower technical quality dimensions as

compared to the results of his earlier study. In comparison, scores on service

quality dimensions remain unchanged between the two studies. Overall, he

concluded that the three groups still perceived service quality, relationship,

40

independence and competence as an important part of the larger concept of audit

quality.

Recently, Beattie et al. (2011) examined the perceptions of two-hundred and

nineteen audit partners, one-hundred and thirty AC chairs and one-hundred and

forty-nine chief financial officers concerning the impact of economic and recent

regulatory factors on audit quality in the UK. Overall, five factors that could

enhance audit quality were rated high by the respondents: i) communication

between external auditor and AC; ii) financial background of AC; iii) auditor

independence (person in position to influence outcome of the audit does not have

direct or indirect financial interests with the client); iv) size of audit firm; and v)

composition of AC consists of independent non-executive directors. In comparison,

three factors that were considered by the respondents to undermine audit quality

include: i) management time and cost in changing auditors; ii) budget pressure

imposed on staff; and iii) non-big four firm. In general, they found that factors

related to recent regulatory reforms (such as disclosure of non-audit fees paid to

auditor with detailed breakdown, requirements of audit partner rotation, risk of

litigation, AIU independent inspection and publication of reports and risk of

investigation by the FRRP) had minimal effect on the level of audit quality.

A few themes are evident in this area of research. First, there is no consensus on

what audit quality means. The preparers, users and auditors view audit quality

differently. Second, what constitutes audit quality is subjective and varies

depending on the perception and expectation of various parties concerning audit

services. Finally, most research in this area used either survey questionnaires or

experimental study that provide limited understanding about how audit

practitioners, AC members and regulators conceptualize the idea of audit quality

and its influence on their process and activities since structured questions are used

to examine the issue.

Audit Expectations Gap

A final field of the auditing literature that is relevant to the underlying issue of audit

quality is that related to the notion of the audit expectations gap. The long-

established expectation of the role of the external auditors is to improve the

credibility of the financial information through independent verification of financial

statements (Mautz and Sharaf, 1961; Wilcox and Smith, 1977; Wallace, 1980). The

professional standard, ISA (UK and Ireland) 200 (APB, 2009), expects the auditors

to express a true and fair view on the financial statements, which is in accordance

with the financial reporting framework. The APB issued the Auditors‘ Code (APB,

41

2004b) which, among other things, expects the role of the external auditors to

provide value by adding reliability and quality to financial reporting as well as

providing constructive recommendations to the management that can contribute to

the effective operation of the business and the capital market. The company‘s

management expects the external auditors to provide value for money services and

non-audit services (Mills and Bettner, 1992; Beattie and Fearnley, 1995) while the

public expect the external auditors to guard companies against fraud and error

(Percy, 2007).

Some past research has recognised that diverse expectations on the role of the

auditor have resulted in different perceptions and expectations concerning the

quality of audit services (Carcello et al., 1992; Sutton, 1993). A number of authors

have also highlighted potential conflicts (Wilcox and Smith; 1977; Mills and Bettner,

1992) and the ‗expectations gap‘ (Porter, 1991; Humphrey et al., 1992; Porter,

1993; Sikka et al., 1998) in the auditing environment that result from the

differences between the views of different groups of participants in the financial

reporting process. Prior research, in most cases based on questionnaire surveys,

has documented the existence of a gap in various areas relating to auditors‘

responsibilities and audit performance (for further reading please refer to: Porter,

1991; Humphrey et al., 1992; Lee, 1994; Sikka et al., 1998). Porter (1993, p.50)

provides an analysis of the components of the expectation gap:

1. The reasonableness gap: defined as a gap between ‗what society expects

auditors to achieve and what auditors can reasonably be expected to

accomplish‘.

2. The performance gap: defined as a gap between between ‗what the public

can reasonably expect auditors to accomplish and what they are perceived

to achieve‘.

The audit expectation-performance gap can be further divided into:

1. The deficient standards gap: a gap between ‗the duties which can

reasonably be expected of auditors and auditors‘ existing duties as defined

by law and professional promulgations‘.

2. The deficient performance gap: a gap between ‗the expected standard of

performance of auditors‘ existing duties and auditors‘ perceived

performance, as expected and perceived by society‘.

42

Mills and Bettner (1992) highlighted four themes for the expectation audit gaps that

exist and possible conflicts in the audit profession due to miscommunication or

misinterpretation of the external auditor‘s role. The following are the themes:

Gap 1: The audit expectations gap that is linked to the difference between what the

public and the auditor believe about the external auditor‘s duties and

responsibilities. Three possible conflicts are identified as a result of the gap: 1)

conflict between the audit firm‘s self interest and society‘s demand for objective

and credible information, which means, the auditor faces a dilemma in providing

high-quality audit service at a reasonable price; 2) conflict in meeting growing

expectations of the public on social, political and environmental issues that is

beyond the focus of the financial reporting; and 3) conflict about the extent of

direct regulation of the audit profession to provide control on the profession‘s

activities to protect the public interest.

Gap 2: Scope of services gap, which is associated with the difference between the

client‘s expectations on the range of services (for example, management advisory

services) and the attestation responsibility of the auditor to the owner or

shareholder. The more diverse the scope of services offered by the external auditor

the more likely it could create a conflict of independence for the auditor.

Gap 3: Intraprofessional competition gap, which is related to the state of the audit

market where the big size audit firms enjoy oligopoly power over large public

clients that hinders open competition in the audit market for the other audit firms.

As a result, this has created a two-tier profession, which results in conflict

associated with competitive behaviour among the audit firms.

Gap 4: The role ambiguity gap is associated with the difference between the values

and norms that the audit firm perceives and the audit staff‘s own perceptions of

those values and norms. A conflict might exist if the audit firm goal is incongruent

with the audit staff‘s own goal. For example, an internal message about the

importance of audit quality might be contradicted by a message about cost cutting

to maximise profits.

The above summarises the gaps and potential conflicts that exist in the auditing

environment. The themes that emerge relate to: the extent that commercial

interest has an effect on activities and the role expected of the external auditor, the

degree to which auditors are independent and to whom the auditor should be

accountable.

43

2.1.4 The Limits of the Traditional and Other Approaches

to Audit Quality

The above overview of the research literature (section 2.1.1) reveals that

traditional research approaches has focused on notions of competence and

independence of auditors suggested by DeAngelo (1981a) as analysis frameworks

for audit quality. One of the problematic aspects of this definition is that users of

the audit services need to assess both the technical competence and the

independence of the auditors. To assess technical competence will require the users

to assess and examine the audit working papers and compare how well the work is

done with established auditing standards and guidelines. However, it is impossible

for the users to assess and examine the audit working papers. Therefore, the audit

profession and regulatory body demonstrate the quality or appropriateness of the

work conducted through a peer review process and inspection by an independent

regulatory body such as the AIU or the Public Company Oversight Board (PCAOB).

To assess independence of auditors is more difficult because independence in mind

is rather abstract and related to the ethical and moral beliefs of the individual

auditors. Nevertheless, independence in appearance of the auditors is more

observable and can be related to various aspects of the auditor-client management

relationship such as auditor tenure, which is the length of time that auditors have

been associated with the company, and the percentage of the non-audit services

fees (these aspects of audit quality have been extensively investigated in the

traditional view of auditing).

The above discussion highlights the problematic nature of the definition of audit

quality in respect of the users gathering the necessary information to evaluate the

quality of a particular audit. In addition, this standard definition of audit quality,

which serves as a framework of analysis in most audit quality studies, might not be

sufficient to represent audit quality because of its narrow focus, which is only on

the aspects of the competence and independence of the auditors (Duff, 2004).

Furthermore, most of the studies employ agency theory and are undertaken from a

North American perspective, often show conflicting results and neglect the social

and organisational context of the audit which might influence quality (FRC, 2006b;

Humphrey, 2008). From the methodological standpoint, the economic rational does

not provide a precise definition or theoretical status for audit quality, and the

surrogates or proxies of audit quality that have been examined in the prior research

are still inconclusive. Operationalising the concepts of audit quality, therefore, is

open for further investigation. Indeed, publications such as ‗Audit Quality‘ by the

ICAEW in 2002 and ‗Promoting Audit Quality‘ by the FRC in 2006 have highlighted

44

the importance of other aspects of auditing that recognise a broader view of the

concept of audit quality.

Although existing archival studies (such as studies on inputs and outcomes related

to audit quality), surveys (such as, research on users‘ and preparers‘ perceptions of

audit quality) and laboratory experiments (such as, research on judgement and

decision making) have revealed a considerable amount about the importance of

audit quality in the audit contract, threats to achieving appropriate quality and the

nature of auditor judgement (see Francis, 2004 and Watkins et al., 2004 for

reviews of the literature), these studies are unlikely to provide meaningful insights

into the actual audit practices of auditors. Even if the researcher introduces more

variables or complexity into surveys or experiments or archival data, it is still

debatable whether a researcher can capture or understand the pressure and

influence of the audit environment on the quality of audit performance (Humphrey,

2008).

Power (2003, p.379) points out that limited research has addressed auditing

practice ‗in context‘ and as a result, much less is known about auditing in its social

and organisational context, as compared to experimental settings. For example,

there is still a great deal that is not known about the nature of actual audit

practices and the meaning those who conduct audits and those who oversee auditor

appointments and work performance associate with the concept of audit quality.

Little attention has been given to questioning how the meanings of the concept of

audit quality are constructed, promoted and operationalised by individual auditors,

that is, how ‗real audit practice‘ relates to audit quality. Furthermore, little is known

about how individual auditors construct or negotiate terms of audit quality with

different outside constituents. In a similar manner, there is limited understanding

about how auditors‘ interactions between other audit market constituents, such as

the regulator and AC members, influence their conception of audit quality or vice

versa. There has been little attention given to questioning how the meanings of the

concept of audit quality are constructed, promoted and reacted to by individual

auditors, the regulator and AC members. This study attempts to add to research

findings and knowledge on these issues.

Most prior research has concentrated on issues surrounding audit quality without

really examining how it is operationalised and given meaning and the potential

influence of internal and external factors in the auditing environment on the

meaning of audit quality. It can be argued that much of the prior literature does not

address the societal context of audit practice or how audit quality is understood

45

within its organisational and institutional setting. In line with calls for more research

that understands accounting and other phenomena within their social and

institutional context (Burchell et al., 1980; Dirsmith et al., 1985), there is a need to

approach the study of auditing practice with reference to its practical context. The

next section will further discuss some research on auditing in its organisational and

social context that is relevant to audit quality and contributes to the development of

the underlying concerns of this thesis.

2.1.5 Auditing Practice in its Organisational and Social Context

This section reviews existing auditing literature the purpose of which is to develop

an understanding of audit practice in its social and organisational context. The call

to consider auditing in context has resulted in a stream of research that considers

the way in which auditing practices both shape and are shaped by the environment

in which they operate (Humphrey and Moizer, 1990; Pentland, 1993; Hudaib and

Haniffa, 2009). The position implicit from this approach to auditing is to go beyond

the traditional view of auditing as a neutral, objective and scientific phenomenon.

Accordingly, this approach concerns the understanding of the auditing phenomenon

as a socially constructed activity that defines and constitutes certain aspects of

reality, which are influenced by its organisational and social context. Research with

this focus has, whether explicitly or implicitly, acknowledged and sought to address

limitations in more rational-economic or functionalist approaches to auditing

research. A range of critical and sociological approaches has been brought into the

auditing arena in this process. This section will argue that this ‗alternative‘ set of

approaches have enhanced our understanding of auditing practice in various ways.

Audit Practice and Production of Audit Quality

A number of field studies in auditing provide significant evidence of the ‗messy

realities of practice‘ that draw attention to auditing as a socially created activity

(Pentland, 1993; Power, 1995; Fischer, 1996). The studies show auditing practice is

context dependent and can serve different roles and functions (Burchell et al.,

1980; Nahapiet, 1988). Humphrey and Moizer (1990), support this view of auditing

as a socially created activity, where from a series of interviews with 18 audit

managers in the UK, they found that commercialisation of the audit firms and

company managers influence the audit planning. They argued that planning serves

not only as a techno-rational function designed to enhance the quality of the audit

(in terms of efficiency and effectiveness), but also as a tool to legitimise the

auditors‘ decisions about the extent and the nature of audit work, and as a

46

marketing device to enhance the revenue generation of the audit firms. Different

roles of audit practice are also supported by Carpenter and Dirsmith (1993) who

viewed statistical sampling as more than a technical function that aims to serve the

effectiveness and efficiency of gathering audit evidence for better audit judgments

and saw it as also playing a significant role in legitimating and controlling abstract

knowledge of the audit profession. A similar view is also forwarded by Fischer

(1996) who from a study of implementation of audit technologies within several Big

Six firms showed that change or innovation in audit process was not because of

better audit but also drives by business side of auditing that legitimised sample size

reduction or ‗over-auditing‘.

Pentland (1993) conducted a fieldwork study that examined the formation of audit

judgement by auditors. In particular, he examined how auditors become

comfortable with figures in the financial statements and the representations

presented by the corporate management. Based on case studies of two audit

teams, he concluded that auditors relied on ‗gut feeling‘ or audit ritual to produce

such comfort rather than ‗structure‘ or the technical function of audit. The

production of comfort from a rituals perspective highlights how comfort is treated

as an article of trade within the participants involved with audit services such as

audit teams, the audit firms and the capital community at large. Pentland showed,

for example, how the production of working papers that support the audit opinion

produce order and comfort within the audit teams, and become a foundation of the

community‘s trust in auditing from the external viewpoint. The notion of patriarchal

settings (the priests) and acts of ceremonial character (the signature is sacred)

signify the social and contextual aspects of auditing activity.

Mills and Bettner (1992, p. 192) suggested the auditing profession uses the ‗rituals‘

of the audit process involving planning, evidence gathering and audit reporting to

represent, among other things, objectivity, integrity, professional scepticism,

technical competence or, in general, the quality of the audit services. This ritual is

also perceived as important for the legitimacy of the auditors‘ actions, to build trust

and confidence in the profession, and in maintaining the ‗social order‘ of financial

markets and economic systems.

From the social perspective, auditing is not seen as an economic rational response

to the business demand but rather it is either seen as social construction through

negotiation of audit knowledge and creation of auditable environments (Power,

1996, p. 294) or as a social function that changes according to social change and

needs (Flint, 1971, p. 287). Power (ibid) argued that audit activity is derived from

47

the active process of ‗making things auditable‘, which, contrary to official images, is

not derived from a neutral activity. He stated that auditors needed to construct and

count what can be regarded as audit evidence within the audit knowledge. Hence,

audit activity creates environments in which its knowledge base is legitimate and

successful. In this respect, auditing is treated beyond a technical exercise of

verifying financial statements. Therefore, auditing is a product of interaction and

negotiation between auditors and other parties within the auditing ‗system‘.

A number of field studies in auditing provide some evidence of the influence of

regulatory, political and economic conditions and other audit market constituents

(audit client, professional associations and regulatory bodies) in the audit setting on

audit practices, how the audit practitioners come to see themselves and the

construction and presentation of legitimate and useful knowledge of auditing. In

other words, role, practices or performance of auditors may partly be shaped and

influenced by their interactions with various societal institutions including

professional bodies, audit clients, regulatory bodies and the public in general.

More recently, Khalifa et al.‘s (2007) study of the discourse of audit methodology

provides an example of the influence of competitive pressure in the audit market on

the development of audit methodology that promotes business risk auditing for

‗clients‘ rather than enhancing the quality of audit in practice through enhancing

audit effectiveness. A study by Curtis and Turley (2007) highlighted conflicting roles

of audit methodology in the organisational context of audit practice to legitimate

the production of audit and production of profits that result in tensions between

administrators in a large audit firm and audit practitioners.

The literature on regulation and its impact on audit practices and, in consequence,

audit quality is relatively scant. Nonetheless a few studies provide some evidence

about the potential impact of regulation on audit quality. Nagy and Cenker (2007)

conducted interviews with auditors in the US and show that increased regulation

through implementation of SOX (2002) has impacted auditors‘ professional

judgement and overall audit quality through creating a compliance approach to

audit that hinders auditors‘ reasoning capabilities. An earlier study by Francis

(1994) indicated that new regulations as response to accounting scandals normally

lead to highly standardised and structured audit approaches that potentially reduce

audit quality by limiting dependence upon professional judgement. In like manner,

Hatherly (1999) suggested that increased regulation and economic pressures in the

auditing setting might displace some level of professional judgement from auditing

to achieve cost effectiveness.

48

Richard (2006) considered how the role and the relationship of the financial director

and auditor influence the quality of the audit process. Using an interpretive

approach, sixty interviews were conducted among sixteen listed firms and eight

audit firms in France. The results suggest that relationship dualism

(professional/personal relationship) and hybrid trust provide the foundation for the

affiliation of the financial director and auditor. Richard argued that

professional/personal relationship and trust is a relevant dimension in the audit

process. She further explained that trust and personal relationship influence the

audit process such as the speed and performance of audit services and the

exchange of information. Richard recognises the existence of a peers‘ relationship

that emerges from the hybrid trust and the dualism of the financial directors and

auditors‘ relationship. The peer relationship is shaped by its social structure,

professional and cultural norms (normative isomorphism), frequency of the

relationship and the multiplexity of the relationship. The author proposes the

concept of parity from this interpretative conception, which influences the

independence and competence of the auditor (audit quality).

Hudaib and Haniffa (2009) studied the meaning of auditor independence in Saudi

Arabia and applied concepts of social interaction, joint action and differential degree

of power in symbolic interactionism. Based on interviews, observations and

document analysis they found that construction of the meaning of independence

was influenced by auditors‘ reflective perspective concerning their reputation and

ethical reasoning. It was also found that commercial activities and image

management of the audit firm as well as political and social-economic structures of

the country influence the meaning of independence. Similarly, earlier work by

Sucher and Kosmala-MacLullich (2004) showed the construction of audit

independence in Czech Republic was influenced by socio-economic and cultural

pressures in the country. Both studies showed the influence of interaction between

auditors and others in a ‗social system‘ to form the concept or representation of

independence. Therefore this suggests a social construction aspect to the reality of

auditors‘ independence.

Overall this literature has identified a range of issues in auditors‘ social and

organisational context which influence audit practices. These studies recognise the

complex and ambiguous nature of the audit environment and highlight that in the

auditing context, where the quality of output in terms of assurance cannot be

measured, audit practices (e.g. audit planning and methodology) serve symbolic as

well as technical functions and have much to do with creating a sense of legitimacy

for audit practice and abstract audit knowledge.

49

Auditing has been recognised as a ‗profession‘ that influences the ideology and

practices of its members. According to Burns and Haga (1977) public accountants

are considered to be a profession because they meet these two conditions: first, the

function or role of the public accountants is crucial to others (such as investors,

lending institutions, and regulator) and, second, public accountants possess

‗mystique‘ or expertise, technical knowledge and specialised training that is not

available or cannot be performed by ordinary people. Flint (1988) outlined five

attributes that qualify auditing as a profession:

(i) Auditing provides a service to the public, and its members have specialist

knowledge and skills or competence that is acquired from advanced level

education, training and experience that are based on systematic theory and

intellectual knowledge;

(ii) Due to the nature and complexity of the audit service, non-members are

unable to critically judge its quality;

(iii) The nature and complexity of the service require the profession to have a

procedure that is designated to its members;

(iv) The members of the profession are required to be objective, impartial,

honest and not-self interested;

(v) The profession has a procedure to monitor its members for maintaining

standards of competence and behaviour and also has a right to take disciplinary action for breach of the standards.

From the above, several important features of auditing as a profession can be

identified, which influence its social significance and perceptions about its work

practices. First, the formation of ‗serving the public interest‘ as an ideology in

pursuit of social acceptability and the credibility of the profession, which establishes

the importance of the work to society. The ideology also creates a self-image that

gives social value to the role and function of the auditing profession. Baker (2008)

argued that the profession has used the ideology of ‗public interest‘ as a rhetorical

claim to gain legitimacy from a wider public about the role of the auditors and the

quality of their work performance. He suggests the importance of the idea of public

interest in providing a socially integrative function for the profession to legitimate

and justify its authority, practices, activities and function.

Second, the establishment of ‗specialist knowledge‘ or expertise through

professional qualifications, training and experience, which underlie audit practices,

are important symbols of professionalism for acceptable representation of the work

practice of the auditors and, to some extent, of its quality (Power, 1996). Hines

(1997, p.89) suggested that the profession had used the symbols of

professionalism to claim and maintain an abstract and incoherent body of

knowledge for the profession. She also suggested that the conceptual framework of

the accounting profession concerning the importance of image or the appearance of

50

the body of knowledge to maintain status quo restricts competition as well as the

intervention of regulation on the profession. Third, in addition to the assessment by

the accountancy profession (such as peer review), the existence of standards and

guidelines (e.g. codes of conduct) were seen to be important in signalling that a

certain standard of quality had been achieved and maintained in members‘ work

performance and the autonomy of their work.

Some researchers have argued that the deterioration or de-professionalization of

the status of auditing as a profession has led to a crisis about the role of the auditor

and quality of audit work (Humphrey and Moizer, 1990; Sikka et al., 2009). In

particular, the crisis is strongly connected to the shift in ideology of the profession,

which shows that the role of auditors and audit practice is more to accommodate

the commercial interests of the audit firms rather than the public interest (Hanlon,

1994). Baker (2008) highlighted the distortive aspects of the ideology that are

caused by the economic interest of the profession rather than public interest, which

leads to a conflict in values and practices within the profession. Wyatt (2004)

highlighted a change in culture in firms that focuses on revenues and profits that

drive commercial actions and behaviour.

Sikka at al. (2009) suggested that auditors are members of a commercial

professional service firm that seeks to increase its profit and market share. As a

result, the personal aspect and conduct of its members, and representation of audit

knowledge and practice should be consistent with economic pressure and client

legitimacy rather than in favour of public interests. Some researchers have argued

about the impact of the commercial interest of the profession on the auditor‘s

independence and audit performance. For example, time budget pressure, which is

caused by the emphasis on revenue, can have a negative impact on audit quality

through auditor‘s engaging in dysfunctional behaviour, such as reducing sample

size or prematurely signing-off the audit report (Kelley et al., 1999; Otley and

Pierce, 1996a). The commercial interest of the audit firm may also have a negative

impact on the appearance of audit quality by reducing the ability of the auditors to

maintain their independence because of a significant amount of non-audit fees

received from the audit client (Pany and Reckers, 1984)

Some researchers have suggested that the notion of professional appearance is

important for the auditors in managing the impression of their client as an

indication of audit quality rather than their professional attributes or values. The

qualitative case study by Grey (1998) reveals that auditors regard the notion of

professionalism to be closely related to forms of behaviour or self-presentation

51

rather than professional accreditation and technical skills. Grey noted that this

aspect of professionalism espouses a whole range of self-presentation including:

“Communication; self-confidence; initiative; ability to win confidence and

respect from clients and colleagues; performance under pressure;

cooperativeness; reliability; self-motivation; business sense; appearance;

presentations skills; contributions in meetings; rapport with client;

managing client expectations; logical organisation of written work; neatness of written work; meeting deadlines” (Grey, p. 575).

Similar to Grey, the interview study by Anderson-Gough et al. (2002) showed that

the auditors‘ understanding of the meaning of professional is primarily connected to

issues pertaining to personal conduct and appearance, which are important for

managing the impression about the quality of audit activity rather than determining

the content. Furthermore, both studies suggest that the idea of professionalism as

appearance is largely constructed around the ‗client‘ of the audit firms. The recent

study carried out by Carrington (2010) suggests that professional appearance is

important to indicate that sufficient quality is performed in the conduct of the audit,

although there is no necessary connection between appearance and performance of

work tasks. He indicates the importance of appearance for the legitimating role of

the auditor as the result of a weak knowledge base of the audit.

Power (2003, p.385) mentioned that external auditing emphasises appearances and

processes (such as, expertise, competence, working papers and audit planning) to

signify audit quality when the quality of the output is unobservable within the

practice as well as to the outside people. Since auditors are unable to demonstrate

an objective measure of their output, focus on appearances and processes are

important to symbolise quality in their claim to the knowledge base of auditing and

work practices. In fact, auditors themselves face problems in determining what

good quality is:

“Even where audit effort can be made transparent, audit quality is obscure

to auditors themselves. It is not analytically clear what „good auditing‟ really

is, since outputs are sufficiently ambiguous for auditors themselves to be

unsure. Auditors do not know if they are good auditors or not, however much effort they put in signal to outsiders” (Power, 2003, p. 389).

Power (1996) provided an analytical framework for understanding the knowledge

base and production of the audit and suggests four elements that are involved in

the process (see Figure 2.4). The first element is referred to as the knowledge

structure of audit practice. At this level, audit knowledge is established and

legitimised through the construction of codified rules, auditing standards and audit

regulations, which are issued by various professional institutes and regulatory

52

bodies. In addition, auditors also use audit working papers to convey audit

knowledge to the public (especially legal and regulatory audiences). Second, the

elements of the auditing knowledge system explain the use of education, licensing

requirements, professional examinations, training and continuing education by the

auditing profession to legitimate their abstract knowledge. The third level addresses

the level of audit practice such as audit judgements and audit procedures (sampling

and risk analysis). Power argued that the audit process and procedures shape the

representations of audit knowledge. Finally, the fourth level involves quality control,

such as peer review and various other feedback mechanisms that are created to

mediate the practice and official knowledge structures.

Figure 2.4: The System of Auditing Knowledge

Source: Power (1996)

Auditors also undertake various legitimating strategies and acts such as espousing

norms and values as an independent expert auditors acting in the public interest

and emphasising procedural aspects of audit, not only to represent and

communicate audit quality but more importantly to secure their professional status,

claims to expertise and to maintain legal monopoly power granted to them. Neu

(1991) suggested that the audit profession engages in ‗impression management

techniques‘ through four sets of techniques (entry requirements, standards and

guidelines, disciplinary activities and charity activities) that are used to create and

maintain a schema of trust that helps to maintain legitimacy and professional

privilege as well as other functional aspects of audit practices.

3. Practice

1. Knowledge

4. Control 2. Education

53

The above discussion highlights the importance of auditors‘ personal conduct and

appearance as well as various ‗impression techniques‘ and processes as

representations of quality in the absence of observable features in quality of work

performance. The analysis also highlights the issues of role conflicts and the

commercialisation of audit firms which may influence the nature and practice of

audit.

2.2 Professional Perspectives on Audit Quality

From a more practitioner perspective, audit quality has been examined with

reference to the degree to which the audit conforms to applicable auditing

standards (Cook, 1987; Aldhizer et al., 1995; McConnell and Banks, 1998; Tie,

1999; Krishnan and Schauer, 2001). For example, Krishnan and Schauer (2001)

documented a positive association between audit firm size and compliance with

generally accepted accounting principles (GAAP) disclosure requirements (after

controlling for other factors such as client size, financial health and participation in

peer review). McConnell and Bank (1998) discuss audit quality in relation to the

confirmation of accounts receivable according to SAS no. 67. They argue that audit

quality will be enhanced if auditors have a thorough understanding of the accounts

receivable confirmation process as it will likely detect material misstatements.

Practitioner approaches to audit quality also tend to place more emphasis on the

process around the audit and within which professional judgement is exercised. For

example in the UK, the ICAEW identifies five factors that could drive audit quality in

practice: (1) leadership, (2) people, (3) working practices, (4) monitoring quality

practices, and (5) client relationships (ICAEW, 2002). They argued that these are

the major factors underpinning audit quality in practice; activities or practical things

that a firm could or should pursue to build, promote and maintain audit quality.

“Audit quality depends on a number of critical factors: people and their

training, audit firms and their processes, clients and corporate governance”

(ICAEW, 2002, p. 2).

“Audit quality has many contributing factors including good leadership,

experienced judgement, technical competence, ethical values and

appropriate client relationships, proper working practices and effective

quality control and monitoring review processes” (ICAEW, 2002, p. 9).

This construction of audit quality suggests that quality is about the auditors‘

professional judgement, which is supported by people who carry out the audit

processes, people who command and oversee it, systems of quality control that

monitor it, and individuals and the firm‘s values that uphold it. It is clear that rather

than defining what audit quality is, much of the effort now concentrates on

54

identifying activities or factors that could have an impact on the audit processes

and audit quality.

“The quality of audit opinion lies in that of the judgements the auditor

makes. These in turn dependent on the quality of the evidence that has

been gathered and the quality of the people gathering it” (ICAEW, 2002, p.

7).

“Ultimately, auditors provide a quality service to shareholders if they provide

audit reports that are independent, reliable and supported by adequate audit

evidence” (ICAEW, 2002, p. 8).

Obviously, the quality of the audit judgements cannot be directly assessed or

measured. As a result, the central feature of audit quality highlighted by the

profession is about the quality of the audit process that supports their professional

judgement. The focal point of discussion in the paper is about the importance of

activities, events, or conditions, or ‗inputs‘ to the audit processes and the effect on

the quality of the output (judgement):

“Inputs can be judged by the quality of the output. If errors are often made

or poor judgement is exhibited, then the inputs need to be considered.

These include the quality of staff training” (ICAEW, 2002, p. 48).

Further analysis shows that the practical construct of audit quality proposed by the

ICAEW can be categorised into three main elements (Figure 2.5). The first element

is governance and the control of the firm, which comprises working practices,

monitoring quality processes and client relationship. Good working practices are

argued to influence the quality of audits. For this reason, it is important for audit

firms to clearly define the roles and responsibilities of their members. Good working

practices are also supported by adequate audit planning, the characteristics of the

people that are executing the plan and the people that are reviewing the practices.

Good working practices are also recognised as part of the control in the audit

process:

“Good working practices need to be embedded in the audit process; they are

an intrinsic part of the firm‟s quality control procedures” (ICAEW, 2002, p.

11).

Another important aspect of the governance and control of the audit firm concerns

its monitoring quality processes. Formal and informal quality monitoring procedures

are set up or implemented to assess the quality of audits. These include control

reviews, audit reviews, compliance reviews, training and learning and office

memos.

55

Figure 2.5: Practitioners’ Construction of Audit Quality

The importance of control in managing audit clients is also highlighted in the

ICAEW‘s paper. For instance, control is necessary to monitor client acceptance or

continuance, which could reduce the risk of audit failure. The impact of non-audit

services should also be safeguarded to ensure that independence will not be

impaired or influence audit quality. Finally, effective communication and an open

relationship between the auditors and audit committees are important to the

performance of the audit.

The second element of audit quality is the individual or people in the firm. The

practitioners stress the importance of individual expertise, experience, skills and

values to the quality of audits.

“Audits are performed by people, so audit quality depends on their

quality...The quality of a firm‟s people and their performance depends on

their competence and motivation” (ICAEW, 2002, p. 18).

The third element of audit quality is the culture of the audit firm. Effective leaders

are responsible to set the overall tone in the audit firm. They are responsible to

establish firm wide policies and procedures that embed quality culture to promote

audit quality. For instance, the firm‘s policies and procedures such as recruitment,

reward and training should reflect quality as important features. Leaders are also

responsible to promote quality by communicating it at all levels in the firm.

“Whatever the size of firm and however it defines audit quality, this will only

be achieved if its importance is central to the strategy and objectives of the

firm‟s leadership and it is translated into practical actions. Audit quality is a

collective responsibility but the tone has to be set up from the top and

people have to be accountable” (ICAEW, 2002, p. 13).

Elements in Practitioners‘

construction of audit quality

Governance and control

People

Culture

56

“...quality audits are the results of people working together and being

prepared to take on the responsibility of ensuring that right result is

achieved. Senior people within an audit firm have to take on a leadership

role...the desire to perform the quality audit will results from the sense of

professional obligation and the character of those in charge of the

firm...audit quality is achieved only if it is the keystone of the firm‟s overall

strategy” (ICAEW, 2002, p. 9).

In brief, the construction of audit quality as proposed by the ICAEW emphasises a

wider view of audit quality that recognizes the influence of interaction within and

between the firm and various internal and external factors in the auditing

environment to audit quality.

2.3 Regulatory Perspectives on Audit Quality

The auditing profession and its members are governed by laws and regulations. In

the UK, the members or professional auditors are required to comply with

standards and requirements such as the Auditors‘ Code (APB, 2004b), the

International Standard on Quality Control 1 (ISQC1) (APB, 2009), the International

Standard of Auditing (UK and Ireland) (APB, 2009), APB Ethical Standards (APB,

2004a), and the UK Audit Regulation and Guidance. These standards and

regulations highlight four fundamental elements that could influence audit practice

and performance: (1) individual characteristics, (2) firm characteristics, (3) the

audit report or the output of audit services, and (4) the value of the audit report.

First, the standards, requirements and guidelines emphasise the importance of

individual characteristics to the quality of audit performance. For example, the

Auditors‘ Code (APB, 2004b) stresses the imperative of individual characteristics

such as accountability, integrity, objectivity and independence, competence, rigour

and judgement of the auditor in the conduct of the audit. The APB Ethical Standards

(APB, 2004a) further point out the imperative of auditors‘ independence as a

fundamental characteristic of professional auditors.

Second, standards such as the ISQC1 (APB, 2009) specifically discuss the elements

of quality at the firm level. The standard frames requirements about policies and

procedures that should be established within the audit firm to achieve quality

services. These include leadership responsibility for quality, ethical requirements for

auditors, acceptance and continuance procedures for the audit client, human

resources, engagement performance and quality monitoring.

57

Third, regulators identify that another important element of quality is the output of

the audit services – the audit report. The report should be able to provide some

indication about the quality of the audit performance. The Auditors‘ Code (APB,

2004b) indicates that the report should contain accurate, clear, complete and true

information.

Finally, the quality of audit is also associated with additional value created by the

services. The Auditors‘ Code (APB, 2004b) considers the importance of audits to

enhance the quality and reliability of the financial reporting. In addition, the

auditors should also be able to give constructive recommendations and suggestions

to the management of the company during the course of the audit in the areas

where weaknesses are identified. Here, the ‗value‘ of the audit services involves

producing and enhancing the trust and confidence of the users of the financial

reports to the individual company and the capital market as a whole. Next, the

audit services could assist in improving the efficiency and effectiveness of the

company‘s performance.

Overall, the UK regulatory framework put forward four main elements of audit

quality in its standards and guidelines (Figure 2.6). These elements propose the

importance of inputs (individual and firm characteristics) and outputs (audit report)

of the audit processes and value (trust and confidence) resulting from the

processes. The issue is how the elements of audit quality can be monitored or

measured or verified by the regulator. In the absence of visible criteria in the

quality assessment of the output of audit services, the regulator is more concerned

with the quality of processes involved in producing the audit report.

Figure 2.6: Regulators’ Construction of Audit Quality

Elements contributing to construction of audit quality

Individual‘s characteristics

Verifiability of audit process

Audit

report

Firm‘s

characteristics

Valued added services

58

The audit report is a vehicle where professional auditors express their professional

opinion about the true and fair view of the financial statements. The opinion of the

auditor involves a considerable amount of professional judgement. Because of the

limitations in evaluating the quality of judgement, the regulators are more

concerned with the quality of processes that are involved when auditors form these

judgements. The importance of the verification of the audit processes brings a focus

on the importance of the ‗quality of documentation‘ of those processes as ‗evidence‘

to support the auditors‘ judgement. This effort is reflected in the work of the Audit

Inspection Unit (AIU), which is the body responsible for monitoring the quality of

audit services offered by the public accounting firms.

2.3.1 The AIU Perspective on Audit Quality

The AIU was set up in 2003 after the reforms in the corporate governance and

audit regulation regime following the Enron-Andersen collapse in the US. The AIU is

an independent unit, reporting to the POB, which is within the independent

regulator of the FRC. The AIU is responsible for monitoring the quality of audits of

listed companies and other major public interest entities. The AIU is also

responsible for monitoring public accounting firms‘ compliance with the regulatory

framework for auditors in the UK. The arrangement for independent monitoring

provided by the AIU is set out in paragraphs 13 and 23 of Schedule 10 of the

Companies Act 2006. The work of the AIU is intended to enhance confidence in the

audit process by enhancing the transparency of the work of the auditors and the

judgements made by them.

Scope and Monitoring Approach

The scope of the AIU work covers audits of all companies incorporated in the UK -

listed companies and other entities whose financial condition is considered to be of

major public interest (AIU, 2011). The POB is responsible for approving the scope

and work programme of the AIU and determining which audited companies are

classified within the ‗major public interest‘ category. The responsibilities of the AIU

cover an independent inspection of major public accounting firms – the Big Four

and five other major firms. The AIU also reviews other firms or ‗smaller firms‘ that

also fall under the scope of the work. The cycle of inspection is annual for the Big

Four firms and two years for other major firms.

59

The AIU‘s independent inspection is intended to ‗challenge‘ the audit firms and

auditors, and to focus on audit judgements and audit processes. The AIU‘s

monitoring framework focuses on these attributes (http://frc.org.uk/pob/audit/):

1. Quality of auditing

2. Thorough, robust and challenging approach to inspection visits;

3. Wide-ranging reviews of firm-wide procedures, including an assessment of

how the culture within the firms impacts on audit quality;

4. Risk-based selection of individual audits for review, utilising a risk model

covering listed and AIM listed entities;

5. In-depth reviews of individual audits, addressing identified areas of risk and

including critical assessment of the key audit judgments made in reaching

the audit opinion; and 6. An assessment of the quality of communication with the Audit Committee.

The monitoring framework can be classified into three major areas: quality control,

independence and ethics, and audit performance (AIU, 2009). The AIU assess and

review firm wide policies and procedures, key input elements to the audit process

and a firm‘s individual audit engagements based on the following characteristics:

Table 2.2: The AIU Monitoring Framework

Key areas Principal themes and issues

1. Quality control

1. Leadership, strategy and communications - Tone at the top, which supports audit quality

through the firm's strategy, objectives and targets, internal communications and reward mechanisms

2. Performance evaluation, promotions and remuneration

3. Other human resource matters - Audit training and communications - Credit crunch communications - Client risk assessment and acceptance/continuance

4. Consultation and review - Engagement quality control review

- Pre-issuance technical reviews 5. Audit quality monitoring

- Effective internal audit quality review and other monitoring procedures by the firm; appropriate

and timely actions in relation to weaknesses identified by the audit quality review or through the external monitoring process

2. Independence

and ethics

1. Ethical policies and consultation

- Direct assistance by staff from clients‟ internal audit departments

2. Compliance monitoring procedures

- Annual compliance confirmation - Scope of services - Non-audit services

3. Rotation policies and monitoring

- Rotation monitoring

- Long association and key audit partners

60

Table 2.2: The AIU Monitoring Framework (continued)

Key areas Principal themes and issues

3. Audit

performance

1. Audit methodology

2. Assessing and responding to risk

- Identification of significant risks - Fraud risks - Preliminary analytical review

3. Audit evidence and related judgments

- Impairment reviews - Provisions and accruals - Post-employment benefits - External confirmations - Using the work of an expert

4. Communicating with Audit Committees

5. Audit finalisation

Source: 2008/2009 Audit Quality Inspections: An Overview (AIU, 2009)

The first public report on independent inspection was published in June 2005. The

report published findings from inspections of the four largest UK audit firms

(Deloitte & Touche LLP, Ernst & Young LLP, KPMG Audit LLP and

PricewaterhouseCoopers LLP). In the following year, the AIU reported findings from

inspections of the four largest audit firms and five other major firms (Baker Tilly,

BDO Stoy Hayward LLP, Grant Thornton UK LLP, PKF (UK), LLP and RSM Robson

Rhodes LLP). In 2008, the AIU publicly reported findings from the inspection of

individual audit firms to enhance its transparency following heightened interest in

the form and content of public reporting (POB, 2007).

Since the first publication of the public report by the AIU in 2005, audit quality has

been constructed around the ‗verification‘ of the audit process and related activities,

events or conditions that contribute to the formation of the audit opinion or

judgements (Figure 2.7).

Figure 2.7: AIU Verification of Audit Quality

Individual’s characteristics

Firm policies and procedures

Audit process

Audit judgements

Audit report

61

For this reason, the assessment of audit quality is centred on the ‗quality of

documentation‘ that is supposed to reflect the evidence of a high audit quality. As a

result, adequacy and sufficiency of audit documentation of an audit firm‘s wide

audit policies and procedures, and individual audit engagement are subject to

examination. The assessment of quality of documentation is reflected in the various

procedures and processes of the audit firms. As indicated in the reports issued by

the AIU:

“The AIU continues to believe that the thought processes underlying

significant audit judgments need to be properly evidenced at the time and

that failure to do so increases the risk of them being incomplete or

misguided and of inappropriate audit judgments being made as a result”

(ICAEW, 2008, p. 4).

“We identified a need to improve the quality of audit documentation across

all firms, in respect of many of the audit engagements we reviewed. This

was also an issue that the firms themselves had recognised as needing to be

addressed following previous internal and external reviews. In many cases

we found that audit work undertaken could not be fully understood without

obtaining oral explanations from the audit team and that the rationale for

key audit judgments was not adequately recorded on the audit files. It was

apparent that actions previously taken to improve the position (such as

issuing reminders to audit staff of the need to document properly all work

undertaken) had not been effective” (AIU, 2005, p. 20).

The external monitoring of audit firms, which has been implemented over the

years, often spoke of enhancing the quality of audits. This effort is intended to

make audit quality more visible to outside parties. Audit quality and its related

activities, which were previously unknown to the world outside of the profession,

can now be seen, observed and evaluated. It is an attempt to enhance the

transparency of the audit firm‘s governance and control in relation to audit quality.

A key aspect of the monitoring and assessment of the inspection unit is the review

of the professional judgements undertaken by the auditors. The inspection unit

emphasises the importance of adequate and proper documentation of the process

in the audit judgements as part of the evidence concerning audit quality.

2.3.2 The FRC Perspective on Audit Quality

In February 2008, the FRC issued a framework of audit quality with the intention

that the publication would provide clear guidelines to companies, audit committees,

regulators and other stakeholders in their assessment of audit quality. The

framework followed consultation on the Discussion Paper on Promoting Audit

Quality in 2006. The framework outlines five major drivers that can promote high

quality audits (FRC, 2007):

62

1. The culture within an audit firm

2. The skills and personal qualities of audit partners and staff

3. The effectiveness of the audit process

4. The reliability and usefulness of audit reporting

5. Factors outside the control of auditors

The framework proposed by the FRC recognised a wider view of the factors that

could influence audit quality (Figure 2.8). The framework identified audit reports as

the key output of the audit process. Consequently, the effectiveness of the audit

process is dependent on the internal and external factors within the audit firms. It

identified three levels – individual, firm and institutional – that contribute to the

attainment of high audit quality.

Figure 2.8: The FRC Audit Quality Framework

For example, at the individual level, the skills and personal qualities of the partners

and staff of the audit firms are important to the effectiveness of the audit process.

At the firm level, quality culture plays a significant role in the conduct of the

individual. Lastly, the framework indicates that interactions and communication

between the audit firms, audit clients, and the audit committees could influence the

overall audit performance. In general, the interaction and relationship between

these three levels could influence the quality of audits in practice. The framework

explicitly recognises the wider aspects of audit quality and the performance of the

auditors is influenced by various internal and external factors in the auditing

Firm level:

culture

Effectiveness of the audit

process

Outside factors: such as audit clients, audit

committees and regulatory environment

Individual level: skills and personal qualities

Reliability and

usefulness of audit report

Drivers of audit quality

63

environment. More detailed discussions about the FRC audit quality framework and

comments letters to the discussion paper are available in Chapter 4 of the thesis.

2.4 The Corporate Governance Framework

In response to the corporate failures (e.g. Polly Peck, Maxwell and BCCI) in the late

1980s and early 1990s, the FRC, the London Stock Exchange and the accountancy

profession formed the Committee on the Financial Aspects of Corporate Governance

in May 1991. This committee was later to be known as the Cadbury Committee and

issued its report in 1992. The report made a number of recommendations

concerning the relationship between the chairman and chief executive, the role of

the audit committee, the role of external auditors and reporting on internal control

and the company‘s position (FRC, October, 2010b). Subsequent to the Cadbury

report, various reports were issued and revised: the Greenbury Report (1995), the

Hampel Report (1998), the Higgs Report (2003), the Smith Report (2003, FRC,

2005, and 2010c) and the Combined Code (FRC, 1998; FRC, 2003; FRC, 2006a and

FRC, 2010a). Once again these were in response to corporate failures and scandals

either internally (banking crisis) or as a reaction to corporate events in other parts

of the world. These reports have become a formal framework for the UK corporate

governance regime. In May 2010, the FRC issued the UK Corporate Governance

Code to replace the Combined Code. The new code applies to all companies with a

UK premium equity listing, regardless of whether incorporated in the UK or not, for

accounting periods beginning on or after 29 June 2010 (FRC, 2010). The code

carries through the corporate governance framework that operates on a ‗comply or

explain‘ basis. The code‘s main principles are in five sections, concerning:

leadership, effectiveness, accountability, remuneration, and relations with

shareholders. The Code C.3.1 states:

“The board should establish an audit committee of at least three, or in the

case of smaller companies two, independent non-executive directors. In

smaller companies the company chairman may be a member, but not chair,

of the committee in addition to the independent non-executive directors,

provided he or she was considered independent on appointment as chairman.

The board should satisfy itself that at least one member of the audit

committee has recent and relevant financial experience”.

It can be seen that the discussion of corporate governance has gained popularity

due to the incidents of corporate collapse that have contributed to the development

of the role of the AC in the arena of corporate governance (Zaman, 2002).

64

2.4.1 The Audit Committee

Despite the widespread use of the term of corporate governance, there is limited

consensus on what it is (Razaee, 2009). According to Cadbury (1992), corporate

governance is the system by which companies are directed and controlled. The

definition focuses on the systems of control, financial or otherwise, so as to achieve

a company‘s main objectives. It is also suggested that corporate governance is

related to the effectiveness of regulatory initiatives to penetrate the organization

and ensure compliance with rules via specifically designated officers, audit

committees, and other internal structures (Power, 1997, p. 41). In the corporate

governance arrangements, the AC is considered one of its key mechanisms, and is

responsible for oversight of matters related to financial reporting, auditing and

overall corporate governance (DeZoort, 1997).

There has been a significant increase in the adoption of ACs by companies since the

issuance of the Cadbury and other reports (Collier, 1996; Adelopo, 2010). The

adoption further increased in 1998 when the London Stock Exchange required listed

companies to disclose compliance with the Combined Code as part of its listing

requirements. There are other reasons that contribute to the adoption of an AC in

the UK. Collier (1996) argued that the adoption of the AC by UK companies is a

result of the direct influence of corporate governance practices in the US. However,

the corporate governance practices adopted for UK companies are flexible because

of the principle-based approach of the UK corporate governance framework. This is

in contrast with the corporate governance regime in the US, which adopts a rule-

based approach where compliance is compulsory. On a similar note, both the UK

and the US place great emphasis on the role of the AC as one of the key players in

the corporate governance framework.

Legislative pressure has also been identified as a factor that influences the rise in

the adoption of the AC in UK companies (Zaman, 2002). Although efforts to

legislate for the adoption of the AC have failed and adoption remains voluntary, the

persistence of the attempt, such as the 1976 and 1988 Companies Bill (Audit

Committees) to secure legislation may have influenced the rise in adoption

(Adelopo, 2010). Pressure from the accountancy profession has also been identified

as a factor that contributes to the adoption of the AC in the UK. For example, the

ICAEW (1987), in response to the Eighth Company Law Directive, stated their

strong support for a statutory requirement for an audit committee in all public

companies. Another noticeable factor that has influenced the adoption of the AC is

65

related to the incidents of corporate collapse that resulted in greater expectations

concerning the role of the AC in improving corporate governance (Adelopo, 2010).

The Cadbury Committee (1992) defined AC as a sub-committee of the main board

that comprises mostly independent directors or non-executive directors with the

responsibility for the oversight of auditing activities. The SOX (2002) section 205

(a) defines AC as:

“a committee (or equivalent body) established by and amongst the board of

directors of an issuer for the purpose of overseeing the accounting and

financial reporting processes of the issuer and audits of the financial

statements of the issuer”.

Razaee (2009, p. 120) provides a broader definition of AC, which includes its

expected roles and responsibilities to all other stakeholders:

“The AC is a committee composed of independent, non-executive directors

charged with oversight functions of ensuring responsible corporate

governance, a reliable financial reporting process, an effective internal

control structure, a credible audit function, an informed whistleblower

complaint process and an appropriate code of business ethics with the

purpose of creating long-term shareholder value while protecting the interests of other stakeholders”.

The terms of reference of the expected role and responsibilities of the AC is outlined

in Section C.3.2 of the UK Corporate Governance Code (FRC, 2010a) as follows:

1. To monitor the integrity of the financial statements of the company and any

formal announcements relating to the company‘s financial performance,

reviewing significant financial reporting judgements contained in them;

2. To review the company‘s internal financial controls and, unless expressly

addressed by a separate board risk committee composed of independent

directors, or by the board itself, to review the company‘s internal control and

risk management systems;

3. To monitor and review the effectiveness of the company‘s internal audit

function;

4. To make recommendations to the board, for it to put to the shareholders for

their approval in general meeting, in relation to the appointment, re-

appointment and removal of the external auditor and to approve the

remuneration and terms of engagement of the external auditor;

5. To review and monitor the external auditor‘s independence and objectivity

and the effectiveness of the audit process, taking into consideration relevant

UK professional and regulatory requirements;

6. To develop and implement policy on the engagement of the external auditor

to supply non-audit services, taking into account relevant ethical guidance

regarding the provision of non-audit services by the external audit firm, and

to report to the board, identifying any matters in respect of which it

considers that action or improvement is needed and making

recommendations as to the steps to be taken.

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Section C.3.6 of the UK Corporate Governance Code further emphasises the

principal responsibility of the AC regarding the appointment, reappointment and

removal of the external auditor. In situations where the AC‘s recommendation is

not accepted by the board, the Code requires full disclosure on the matter in the

annual report. In December 2010, the FRC Guidance on Audit Committees

(formerly known as the Smith Guidance) (FRC, 2010c) was updated to assist

members of the committee in carrying out their roles according to the relevant

provisions of the UK Corporate Governance Code.

The Guidance outlines four major areas of best practice for the AC:

1. Establishment and role of AC, which includes membership, procedures and

resources. It also covers issues of appointment, meetings, remuneration,

and skills, experience and training of committee members (Paragraphs 2.1-

2.19).

2. Relationship with the board (Paragraphs 3.1-3.5).

3. Roles and responsibilities. It provides guidance on the role and

responsibilities of the AC concerning financial reporting, internal controls and

risk management, whistle blowing, internal audit process and external audit

process (Paragraphs 4.1-4.44).

4. Communication with shareholders (Paragraphs 5.1-5.3).

Paragraphs 4.17-4.44 of the Guidance specify the role and responsibilities of the AC

concerning the external audit process. The guidelines can be summarised under

four major areas:

1. Appointment of external auditor. The responsibility of the AC to review the

external auditor‘s selection and appointment process as well as investigate

the reason for the auditor‘s resignation. The AC should assess annually the

qualification, expertise and resources, and independence of the external

auditors and the effectiveness of the audit process.

2. Terms and remuneration of external auditors. The AC should approve audit

fees and review terms of engagement. In particular, the AC should review

the scope of the audit with the external auditors and can ask for additional

work to be performed by the external auditors if the scope is inadequate.

3. Independence of external auditors. The AC should assess the independence

and objectivity of the external auditors by taking into consideration the

relevant UK laws, regulations and professional requirements (e.g. APB

Ethical Standards for Auditors). The AC should review and approve non-audit

services provided by the external auditors.

4. Annual audit cycle. The AC should review and discuss with the external

auditors the findings of their work and discuss the effectiveness of the audit process. During the review and assessment the AC should among others:

Review the appropriateness of the audit plan, which includes planned

levels of materiality and proposed resources to execute the audit

plan;

Review key accounting and audit judgements;

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Discuss with the external auditor major issues that arose during the

course of the audit and have subsequently been resolved and those

issues that have been left unresolved;

Review whether the auditor has met the agreed audit plan and

understand the reasons for any changes, including changes in

perceived audit risks and the work undertaken by the external

auditors to address those risks;

Consider the robustness and perceptiveness of the auditors in their

handling of the key accounting and audit judgements identified and in

responding to questions from the audit committees, and in their

commentary where appropriate on the systems of internal control;

Obtain feedback about the conduct of the audit from the key people

involved, e.g. the finance director and the head of internal audit; and

Review and monitor the content of the external auditor‘s

management letter, in order to assess whether it is based on a good

understanding of the company‘s business and establish whether

recommendations have been acted upon and, if not, the reasons why they have not been acted upon.

From the above, it can be seen that the degree of codification of best practices and

the attention given to the activities of the AC have greatly increased (Zaman, 2002;

FRC, 2010c), particularly the role of the AC in relation to the external audit

function. The AC now has greater roles and explicit responsibility for overseeing

audit quality as commissioned by the UK Corporate Governance Code and the FRC

Guidance on Audit Committees. The issue of communication between AC and

external auditors has also been prevalent in the auditing standards. Nevertheless,

the level of expectation concerning the role should be realistic given that its

effectiveness and activity may depend on various factors that influence its effects

and outcomes (Kalbers and Fogarty, 1993; Turley and Zaman, 2007).

2.4.2 Audit Committee Effects on the Audit Function

AC members are among the parties who are responsible for overseeing the external

audit function. The UK Corporate Governance Code and the FRC Guidance on Audit

Committee have emphasised the need for the AC to evaluate various aspects of the

external auditor‘s work, which includes monitoring auditor‘s independence,

appointment and remuneration, and effectiveness of the audit process. Thus, this

section directs particular attention on the influence of AC on audit quality and its

effects on external audit function.

The Link between Inputs and Outcomes Related to Audit Quality and the

Audit Committee

Prior research lends mixed support for the association between the characteristics

or effectiveness (composition, independence, financial literate member and

frequency of meeting) of the AC, and inputs and outcomes related to audit quality.

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Overall, past studies have documented inconclusive evidence on the association

between the existence and the characteristics of the AC with financial reporting

quality. Prior research tends to focus on the impact of the presence or

characteristics of the AC on earnings management, financial restatements and

regulatory sanction. It is expected that the presence of an AC will be likely to inhibit

companies from engaging in earnings manipulation (Dechow et al., 1996) and

result in less adjusting errors in prior reports (DeFond and Jiambalvo, 1991).

Felo et al. (2003) found a positive association between financial expertise and high

quality of financial reporting but were unable to identify any association between

independence and financial reporting quality. Xie et al. (2003) found similar

evidence that showed financial expert members are associated with high financial

reporting quality. Multiple regression analysis used in the study revealed a

significant relationship between active (more frequent meetings) and expert

members, and lower discretionary accruals. Qin (2007) also found a significant

relationship between accounting expertise and earnings quality. He suggested that

AC members with previous accounting positions such as public accountant, auditor,

principal/chief financial officer, controller, or principal/chief accounting officer

relates to high quality of reported earnings.

Bedard et al. (2004) evaluated the impact of AC characteristics: financial literacy,

independence and meetings frequency on earnings management. Using the level of

income increasing/decreasing abnormal accruals, results are consistent with

expectation and show that aggressive earnings management relates to less

financial expertise, independence and meetings frequency.

Piot and Janin (2007) documented mixed associations between the proxies of audit

quality, AC characteristics and financial reporting quality in France. Specifically,

they examined whether auditor size (reputation) and audit tenure, and the

existence of an AC and its independence influence the level of earnings

management. Archival evidence reveals some interesting findings. First, they

reported no significant association between the Big 5 auditors and the level of

abnormal accruals. Similarly, they did not find any evidence that supports the

suggestion that an increase in audit tenure leads to a decrease in audit quality

(increase in abnormal accruals). Second, although the presence of an AC relates to

lower earnings management, other AC characteristics such as independence

appeared to be insignificant. In contrast, Klein (2002) found that an independent

AC is associated with lower earnings management. Using data from 692

observations from year 1992 to 1993 of S&P 500 companies in the US, analysis

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showed a negative association between AC independence and abnormal accruals.

Furthermore, Klein found that the less independent the AC composition, the larger

the abnormal accruals become. This may infer that independence of AC members is

important to oversee the quality of financial reporting process by ensuring lower

earnings management.

Abbott et al. (2003a) examined the effects of expertise and AC meeting frequency

on financial restatements. Results showed a significant negative relationship of both

variables with financial restatements. Carcello and Neal (2000) examined the issue

of whether independence of AC members influences the type of audit opinion issued

by the external auditor. Using data from 223 financially distressed companies in the

US, they examined the association between AC composition and the likelihood that

the auditor will issue going concern modified reports. The findings indicate that the

greater the percentage of affiliated directors in the AC, the lower the probability

that the auditor will issue a going concern opinion.

For example, Abbott and Parker (2000) highlighted the link between AC

characteristics and the appointment of an industry specialist auditor. Using archival

data of 500 US companies, the results showed that independent and active AC

members (that meet at least twice per year) are more likely to select auditors that

specialise in the company‘s industry. The results imply that an independent and

effective AC will demand a high quality of audit and therefore will appoint an

industry specialist auditor on the assumption that they are better in detecting

material errors in financial statements. Chen, Moroney and Houghton. (2005)

replicated and extended the study by Abbott and Parker (2000) by looking at other

variables (director qualifications, number of directorships and provision of non-audit

services) in their model. Using data from 510 listed companies in Australia, the

analysis of the results indicated that AC independence influences the use of an

industry specialist auditor, which was consistent with Abbott and Parker‘s (2000)

study. In contrast, the proportion of directors with financial qualifications and the

frequency of AC meetings were not associated with the selection of an industry

specialist audit firm. The contradictory results might have been due to different

regulatory settings or different variable specifications and measurements. A key

limitation of the above-mentioned studies was that AC effectiveness and industry

specialist auditor causality cannot be directly examined.

The existence of the AC has also been argued to have an effect on either increasing

or decreasing the audit fee. A number of rationales can be offered for this

possibility. First, it is expected that the audit fee will be higher if the AC aims for

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higher audit quality through demanding a high level of audit coverage. Second,

strong internal control associated with AC could reduce audit fees because of less

audit coverage. Collier and Gregory (1996) examined both these propositions in

their analysis of 315 companies of the FTSE 500 in the UK. They found that the

presence of an AC is associated with higher audit fees but found no significant

relationship for the second. In contrast, O‘Sullivan (2000) found no evidence that

the characteristics of the AC influence auditors‘ pricing decisions. Prior research has

also examined the association between the characteristics and effectiveness of the

AC, such as independence, expertise and meeting frequency with non-audit fees

(Abbott et al., 2003b; Stewart and Kent, 2006). Researchers have theorized that

effective AC members have an incentive to limit the provision of non-audit services

as it could compromise auditor‘s independence. Abbott et al. (2003b) suggested

that AC members perceive that a high level of non-audit services could impair

auditor independence, hence, the ACs use their span of control to limit the

provision of non-audit services. The findings from archival data were consistent

with expectations and show that independence and meeting frequency were

negatively associated with the ratio of non-audit to audit fees, suggesting that an

effective AC is able to influence the scope of audit coverage and limit the provision

of non-audit services. However, Lee and Mande (2005) found no significant

relationship between AC effectiveness and non-audit fees. The inconsistent results

highlight the limited effect of the AC on the scope of external audit and auditor‘s

remuneration.

In addition to focusing on the non-audit fees ratio, Gaynor et al. (2006)

investigated three research questions in relation to non-audit services. First,

whether ACs consider the effect of non-audit services on quality of audit before any

approval of the purchase of non-audit services from the auditor. Next, the extent

that mandated fee disclosures affect the AC‘s pre-approval decision. Lastly, the

extent to which the audit committee‘s decision in relation to the joint provision of

audit and non-audit services is consistent with investors‘ preferences. The

experimental study revealed three important results. First, ACs are willing to

appoint an auditor for non-audit services if it improves the quality of audit. Second,

the AC‘s pre-approval decision is affected by fee disclosure requirements. Third,

relative to the AC members, investors believe that the joint provision of non-audit

services will improve audit quality. Thus, this study lends support to investigating

the importance of ACs in improving audit quality (specifically on auditor

independence in fact and in appearance). An important limitation of the study is

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that experimental work might not provide similar results to those in an actual

setting.

In the UK, the Financial Reporting Review Panel (FRRP) is responsible for taking

action against companies for flawed financial statements. The study carried out by

Peasnell (1999) showed an insignificant relationship between the presence of the

AC with a sample of 47 UK companies that were subject to FRRP action. Windram

and Song (2000) showed a significant negative relationship between FRRP action

and the characteristics of the AC (financial literacy, the number of outside

directorship and number of meetings). Beasley (1996) found the presence of the AC

has no significant effect on the likelihood of financial statement fraud.

Prior research has also investigated the perception of AC members on factors that

influence audit quality in practice. Using data collected from a survey questionnaire

of AC chairpersons in the US, Schroder et al. (1986) found that factors related to

audit team (e.g. attentiveness of manager and partner, and planning and conduct

of audit team) are perceived to be more important than audit firm factors (e.g.

relative audit fees size, the results of peer review and litigation). A subsequent

study on AC members‘ perceptions of audit quality was carried out by Knapp in

1991. He employed an experimental study that specifically examined the perception

of ACs on the impact of audit firm size, audit tenure and type of audit approach

(structured vs. unstructured) on audit quality (auditors‘ ability to detect and report

material error). He found that ACs that had experience of working with differing

sizes of audit firm did not perceive big size audit firms as better quality than the

smaller firms. The auditor‘s tenure was perceived to be positively related to audit

quality in the early years of the audit engagements, but negatively related to audit

quality in subsequent years. Interestingly, the study suggests that the AC

members‘ lack of in-depth understanding and knowledge about different types of

audit approach, which would enable them to substantiate its impact on audit quality

that draws attention to the limited skills and knowledge of the AC. Several studies

have also highlighted the sufficiency of knowledge and expertise of AC members,

which may inhibit their capacity to discharge effective oversight function (DeZoort,

1997; Lee and Stone, 1997).

Beattie et al. (2011) examined the perceptions of the AC chairpersons concerning

factors that enhance audit quality in the post Enron environment in the UK. Among

factors that were rated highly by the chairs of the AC that could enhance audit

quality were auditors‘ communication on various issues relating to the audit, audit

fees relative to audit scope, and audit firm‘s internal quality monitoring procedures.

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They also perceived that AC members‘ independence and financial literacy were

important factors that could enhance audit quality.

Operation of Audit Committee and its Effect on External Audit

There are a small number of studies that attempt to understand the impact of the

AC on the audit process as well as to understand the operation of the AC in relation

to the external audit. Cohen and Hanno (2000) can be regarded as one of the first

studies that examined the issue of corporate governance and the audit process.

Using experimental methods they investigated the impact of the oversight activities

of directors and the AC (independence and frequency of meetings), and

management control philosophy to preplanning (client acceptance process) and

audit-planning. The findings indicate that corporate governance activities (strong or

weak) and management control activities (strong or weak) influence the audit

process. In particular, strong corporate governance and control activities influence

auditor consideration concerning the client acceptance process, as well as the

auditor assessment of client business risk. Likewise, both corporate governance

factors and management control philosophy have a significant effect on auditor

planning judgement and subsequent substantive testing, and subsequent control

risk assessments. From a financial reporting viewpoint, the results suggest the

importance of having strong corporate governance mechanisms that can influence

audit quality and financial reporting quality. Strong control environments are

associated with less financial restatements and fraudulent financial reporting, which

might inhibit the attainment of high quality financial reporting.

In an extension of their earlier study, Cohen et al. (2002) carried out a semi-

structured interview with 36 audit practitioners (seniors, managers and partners),

to investigate the impact of corporate governance factors on the audit process.

Specifically, the study attempted to examine three main research questions: first,

the auditors‘ perception on the structure, importance and the effectiveness of

corporate governance factors; second, how auditors consider the impact of the

corporate governance factors in audit planning and the conduct of the audit; third,

auditors‘ views concerning the importance and role of corporate governance in the

audit process, in audit engagement, client acceptance and in the future. The study

revealed that auditors perceived company management as an important structure

in corporate governance. Surprisingly, the auditors perceived the AC as

unimportant and ineffective in the governance process. Next, all of the respondents

indicated that they gather and use corporate governance information in audit

planning and audit performance. Furthermore, the respondents perceive that

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corporate governance is important in the client acceptance stage and for

multinational clients. Finally, the majority of the auditors indicated the greater

importance of corporate governance factors in the audit process now and in the

future. In general, this study provides weak support concerning the impact of the

AC on the audit process. Nonetheless, it is important to note that this study was

conducted to demonstrate AC effectiveness in overseeing the external audit process

before the Enron environment when the AC was less scrutinised.

There is some research concerning process issues in the operation of the AC and its

relation to external audit. Analysis of the fieldwork case study carried out by

Gendron et al. (2004) suggests that the existence of the AC is for more than

ceremonial purposes and the AC meetings are more than formal ritual. The case

study evidence showed the important aspects of asking challenging questions, and

assessing the written and verbal information provided by auditors in the operation

of the AC that contribute to AC effectiveness. This finding is in contrast to an earlier

study by Spira (1999) who argued that audit committee activities, such as meeting

documentation and the process of questioning lack substance and mainly serve as

ceremonial performance to gain the external symbol of legitimacy. Comparatively,

Turley and Zaman (2007, p. 775), using a case study of UK public companies,

showed minimal impact of the AC on external auditor activity. The study provides

limited evidence on: i) impact of the AC on audit design, ii) authority of the AC to

appoint and remunerate auditors, and iii) the ability of the AC to challenge and

question the audit findings in the AC meeting. These results suggest limited effects

of the AC on external audit, and, in consequence, audit quality.

To synthesize, although mixed results have been documented, prior research

generally suggests that there is an association between the existence and

characteristics of the AC and various proxies of audit quality. Nonetheless, most of

the research in this area has employed archival or experiment methods, which

provide limited understanding concerning how the AC contributes to high audit

quality. Similarly, surveys do not provide much information about AC activities or

how the AC evaluates the effectiveness of the audit and audit quality. DeZoort et al.

(2002, p. 69) identified the dominant focus of archival and survey methods in AC

research and suggested that other methodological approaches might be better in

understanding additional aspects of AC activity. Their analysis and synthesis of the

AC literature suggested that there is a need for more research on relationships and

interfaces between the AC and external auditors.

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Turley and Zaman (2004) provided an analytical review of the effects of AC on

three main aspects: audit function, financial reporting quality and corporate

performance. Overall, they suggest more work: i) to understand the operations and

processes of the AC, and, in consequence, its effects; and ii) to understand the role

of the AC within its institutional and organisational contexts; and iii) more

qualitative research methods (case studies and interviews) to complement existing

research beyond documenting the association between the AC characteristics and

its expected outcomes.

2.5 Implications of Review and Research Questions

This chapter has evaluated different strands of research that are relevant to audit

quality. The description of the research aspects related to audit quality set out in

this chapter has drawn attention to the limitations of this work in several areas.

First, notwithstanding its wide-ranging nature and extensiveness, it is apparent that

there has been rather limited progress in our understanding concerning the

meaning of the concept of audit quality beyond the technical competence and

independence of auditors. Essentially, there is a gap in relation to how those

involved in the audit process conceptualise audit quality in practice. Thus, this

thesis sets out the objective of examining the practical conception of the meaning

of audit quality from the perspective of key participants in the audit process –

auditors, AC members and quality inspectors, using semi-structured interviews,

archive documents and a questionnaire survey. This is important because even if

we identify a relationship, such as the size of firm being linked to higher quality

signal, we do not know how the practitioners in a particular class of firm are

viewing the task and what they are doing which gives rise to this link. In like

manner, there is limited understanding concerning how AC members commission

audits in order to satisfy their expectations for high audit quality in practice or how

the operation and activity of the AC has an effect on audit quality. Similarly,

evidence on how audit inspectors evaluate quality and contribute to the

achievement of high quality auditing in practice is rather limited. Therefore, the

current research, which focuses on how audit quality is given meaning by those

involved in conducting, commissioning and evaluating auditing in practice, is

worthwhile and will contribute to the extant literature. The three groups and

specific research design are chosen for two reasons. First, they are directly

responsible for delivering or ensuring the quality of auditing and thereby the

integrity of financial reporting and therefore could provide rich information on the

research topic. Second, the research aims to gain an in-depth and detailed

knowledge of the topic based on the groups‘ opinions, feelings, actions and

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thoughts. As such, qualitative enquiry through archive documents, semi-structured

interviews and a questionnaire survey are best matched with the research

objective. The first research question is formulated to reflect the objective of

providing additional evidence about how the concept of audit quality is given

meaning by those involved in auditing, as follows:

Research question 1: How is the concept of audit quality understood and applied by

key participants in the audit process?

Second, the analysis presented in this chapter suggests that only a relatively small

number of studies consider wider social, organisational and institutional dimensions

in the investigation of audit quality. This has illustrated that quality of audit

performance is influenced by various internal and external factors in the auditing

setting. Nevertheless, relatively little is known about how the factors in the auditing

environment influence and shape the construction of meaning of the concept of

audit quality by key participants in the auditing process. There has been little effort

to understand the possible influence of organisational and social factors on the

construction of meaning for audit quality in practice. Despite the development of

studies which place greater emphasis on understanding audit practice in its context,

so far little attention has been given to exploring how the meaning of the concept

of audit quality is constructed in practice in the context of the social, regulatory and

economic environment of the audit firm. Thus, this thesis aims to examine the

impact on the meaning of audit quality of interactions between the key participants

in the auditing setting and their environment, such as the social, economic,

regulatory and institutional arrangements in which they operate. This investigation

is important because auditing activity is conducted in a social and organisational

setting that may potentially influence what is been regarded as audit quality in

practice. The second research question is formulated to achieve the research

objective as follows:

Research question 2: What are the factors that influence the construction of the

meaning of audit quality in practice?

Third, the description of auditing practice in its organisational and social context

(section 2.1.4) has shown that quality of audit services cannot easily be measured

and, as a result, audit practices can be linked both to technical functions, and

efforts to preserve and strengthen the legitimacy of the auditing profession.

Relatively little is known about the relationship between the meaning of audit

quality and audit practices and how that meaning is represented in practice. There

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are a limited number of studies that examine how the meaning of audit quality is

perceived by the auditors, AC members and quality inspectors and how it is

symbolised in practice and to what purpose. Thus, this thesis aims to examine how

the meaning of audit quality is represented in practice by the key participants in the

audit process. The following question is formulated:

Research question 3: How is the meaning of audit quality represented in practice?

Finally, the review presented in this chapter has highlighted considerable changes

in the auditing and governance framework in the UK as a specific response to the

corporate and auditing failures. As a result, the AC has now greater and more

explicit responsibility for overseeing audit quality as commissioned by the UK

Corporate Governance Code. In addition, there is now greater emphasis on the

importance of communication between the external auditors and the AC towards

achievement of audit quality in practice. In like manner, the changes in the auditing

framework have introduced the AIU as a prominent party to monitor the level of

quality of audit services delivered by the audit firms. The interactions between

auditors with the AC members and quality inspectors may potentially influence

delivery and achievement of audit quality in practice. Despite significant

developments on the regulatory framework in the UK in recent years, there is

rather limited understanding concerning the impact of the changes in the auditing

and governance framework to the delivery and achievement of audit quality in

practice. Thus, this thesis sets out the objective of investigating the impact of the

AIU and the AC members on the achievement of audit quality. The following

questions are formulated:

Research question 4: What is the impact of the AIU on audit quality?

Research question 5: What is the impact of the AC on audit quality?

2.6 Summary

The main premise of the thesis is that auditing is a socially constructed activity,

thus, the meaning of audit quality is socially constructed and is influenced by

societal and organisational contexts: interactions between various parties, and

regulatory and economic factors in the auditing environment. This study seeks to

investigate how the concept of audit quality is given practical meaning by audit

practitioners, AC members and quality inspectors. Rather than viewing audit quality

as an attribute of the individual audit that can be identified and ‗measured‘, it

explores the way in which auditors, AC members and quality inspectors interpret

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and apply the concept and construct meanings that can influence the manner in

which the actual audit process and oversight evaluation of that process are

conducted. Therefore, an interpretive approach and qualitative methodology were

selected to provide better insights into various factors that shape and influence the

perceptions of audit quality within its social and organisational contexts. These will

be discussed in the following chapter.

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Chapter 3

Theoretical Framework and Research Design

3.0 Introduction

Chapter 2 identified that in the extant auditing research, and more specifically, in

that pertaining to audit quality, there is very limited consideration of what audit

practitioners, AC members and quality inspectors understanding to be the meaning

of audit quality and the possible influence of institutional, organisational and social

factors on the construction of that meaning in practice. In other words, there is

limited understanding about how interactions between auditors and other audit

market constituents, such as AC members and quality inspectors influence their

conceptions of audit quality or how the meaning of the concept of audit quality is

constructed, promoted and reacted to by those groups. The purpose of this chapter

is to develop a framework, drawing on symbolic interactionism, to understand the

process of giving meaning to audit quality in its organisational and social context.

This chapter also explains the research approach, research design and research

methods adopted in addressing the research questions outlined in chapter 1

(section 1.3).

This chapter is organised into five sections. Section 3.1 briefly explains three main

research perspectives in accounting research. It specifies in detail an interpretive or

social constructionist perspective that determines the methodological approach

used in this study. Section 3.2 discusses the theoretical framework informing the

analysis. Section 3.3 describes the research methods used, including data collection

and data analysis. Finally, section 3.4 provides a summary of the chapter.

3.1 Research Methodology

Chua (1986) identified three methodological assumptions of accounting research

that delineate a researcher‘s way of viewing and researching the world. First, the

positivist/functionalist (mainstream) research approach, which believes that society

or reality is objective and external to the subject, theory is separated from

observations and human beings are passive and rational in pursuing their goal. This

approach favours the use of quantitative methods of data analysis (hypothetical-

deductive accounts) and collection of data by experiments, surveys and archival

methods to understand social reality or objects that allow for generalisation of

findings. The second research approach mentioned by Chua is the critical approach

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that views human beings as having inner potentialities that are alienated through a

restrictive mechanism. The critical approach believes theories are temporal and

context bound. As such, historical, ethnographic and case studies are commonly

used to understand social reality (for details of both approaches, refer to Chua,

1986).

The third research approach, and the one applied in this thesis, is called

interpretive research. This approach assumes the nature of social reality to be fluid

and subjective; it does not exist in a concrete sense. In contrast to the positivist

approach, the interpretive focuses on individual meaning and people‘s perceptions

of ‗reality‘ rather than any independent ‗reality‘ that might exist external to them

(Hopper and Powell, 1985). The interpretive approach focuses on understanding the

subjective nature of the social world from the frame of reference of the subject

being studied. In other words, social phenomena that happen in society are

understood from the point of view of the participant or actor rather than the

observer (Morgan, 1980). In addition, the interpretive approach views social reality

as socially constructed where reality is emergent, subjectively created and

objectified through human interactions that are given an ‗objective‘ form through

performances, rituals, symbols and artefacts (Berger and Luckmann, 1967; Chua,

1986; Richardson, 1987, p. 346). The interpretive approach also considers that

actors‘ definition and understanding of social reality is influenced by the interaction

between the actor and their environment, such as the social, economic and

institutional arrangements in which they operate.

Berger and Luckman (1967, p. 78-80) proposed that social reality is constructed

during three dialectical moments. First, externalization - conceptions of social

reality are given objective form through performances, rituals, symbols and

artefacts. Second, objectification - conceptions of social reality are accepted as part

of social reality then achieve objective reality in life. Third, internalization -

objectivity of social reality is internalized through socialisation processes (e.g.

education and training) that reflect meaning.

In the case of audit quality, auditing services involve undefined activity and the

quality of its output is unobservable. Normally, the process and procedure of the

audit begin with a series of planning decisions that are tailored to a specific audit

client. It involves various assessments such as reviewing clients‘ risks and internal

control systems that later influence the scope of the audit in terms of the type and

extent of the audit tests. Here, auditors need to exercise their ‗professional

judgement‘ to get comfort that the scope of the audit is appropriate and sufficient

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to allow them to be reasonably satisfied that a high audit quality is achieved and

the financial statements are free from material misstatements and presented in

accordance with generally accepted accounting principles. Nonetheless,

determinations of ‗sufficient‘ ‗appropriate‘ and ‗reasonable‘ are somewhat subjective

and are always supported by the phrase of ‗professional judgement‘ (Humphrey et

al., 1992, p. 148). In this case, auditors must make a decision about the extent and

nature of audit evidence and the level of audit quality that he/she is aiming to

achieve. As a result, different views may be formed as to what audit quality is.

Thus, this highlights the subjective dimension about the reality of audit quality in

practice.

As indicated in Chapter 2, auditing is more than a neutral technical practice and the

activity of auditing can be seen as being socially constructed. For example,

although auditing may involve certain procedural elements the role of judgement or

choice of methods is conducted in a social and organisational setting, which means

it cannot be treated as a standard set of tasks. This is to say that auditing involves

interaction in the process; individual auditors interact with other members within

the audit firm and with various constituents in auditing settings. For example,

auditors interact with peers, superiors or subordinates within the audit firm. The

auditors also interact with the audit client, AC members and regulators who are

among key participants in the auditing and financial reporting system. These

interactions reflect particular interests and expectations that may, in turn, affect

the auditing practices and, consequently, the performance of individual auditors. In

addition, auditing activity involves interaction with the environment where it

operates, such as economic and regulatory conditions in the audit market. All of

these factors may potentially influence what is been regarded as audit quality in

practice.

It has been noted that much of the auditing literature is dominated by so called

‗mainstream auditing research‘ or positivist research that fails to investigate and

acknowledge the social construction of audit practice (Humphrey, 2008). Prior

research provides little information about how audit firms carry out or produce their

audits and the consequences for audit practice (Hopwood, 1996; Sikka et al.,

2009). Consistent with this, many have called for research evidence about audit

practice from the institutional, organisational and societal context of auditing

(Kirkham, 1992; Hopwood, 1998; Humphrey, 2001; Power, 2003). According to

Humphrey:

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“What are certainly needed are studies and approaches that seek to

understand what is, or has been done, in the name and development of

audit practice. The problem with so much audit research is that it does not

explore audit practice per se, but rather fabricates such practice, studying

around the edges of the “black box” of auditor decision-making or

constructing experiments that cannot ever really be expected to replicate

either the real pressures and career challenging or threatening scenarios

that some auditors can encounter in their actual working environment”

(Humphrey, 2008, p. 193).

Previous studies of auditing, which adopt such approaches have been described in

section 2.1.5. These illustrate that research that considers auditing in its

institutional and organisational context is helpful in understanding the phenomena

of auditing. In spite of the contribution of this body of research, there have been

many calls for more contextually based studies of auditing (Lee and Humphrey,

2006; Sikka et al., 2009). Humphrey, in calling for research on audit practice,

commented:

“There is also a great need for more work exploring audit firms as

institutions – on explaining the forces driving working priorities and practice

changes, on understanding the organisational cultures within firms, the

reward and remuneration structures and the impact these have on the

construction and behaviour of auditors, audit teams and audit clients”

(Humphrey, 2008, p. 194).

This current study responds to such calls by providing a rich descriptive account

about the conception of meaning attributed to audit quality in practice within its

social, organisational and institutional context. This thesis uses a symbolic

interactionism perspective as a framework to understand the perceptions of

auditors, AC members and quality inspectors concerning the meaning of audit

quality in practice, factors that influence the construction of the meaning and

related symbols that signify the meaning. The next section will further discuss the

symbolic interactionsim perspective that underpins the analysis of the study.

3.2 Theoretical Framework for the Research

This section explains the principles of symbolic interactionism and their application

to the study. The framework presented in Figure 3.1 builds on relevant aspects of

symbolic interactionism, which considers the dynamic interactions between various

constituents in the auditing setting and the environment that influence the

construction and representation of the meanings of audit quality in practice,

appropriately grounded in its social and institutional context.

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The central ideas of symbolic interactionism were developed from the work of

American scholars, such as George H. Mead, Herbert Blumer and Norman Denzin,

who endeavoured to understand the process of making meaning of a social reality

(Charon, 2007). This perspective pays particular attention to understand how

meanings are constructed based on interactions between people and their

environment. Blumer (1969) asserted that symbolic interactionism is based upon

three principles:

1. Human beings act towards things on the basis of the meanings that the

things have for them.

2. The meaning of such things is derived from, or arises out of, the social

interaction that one has with others and one‘s self.

3. These meanings are handled in, and modified through, an interpretive

process used by the person in dealing with the things he/she encounters.

Thus, human meaning is seen as a social object, which is formed in the context of

social interaction with others and the thinking of the actor and is used by people in

their actions. Charon (2007, p. 47) explains that a social object is any object in a

situation that an actor uses in that situation. That use has arisen socially. That use

is understood and can be applied to a variety of situations. The perspective regards

human meaning as symbolic and behavioural, which means that meaning entails

signification and intention that can be seen in the symbolic realm and related

meaningful action (Prasad, 1993; Hewitt, 2003). Accordingly, meaning as a social

object is signified, created and communicated through the use of symbols (words,

objects and acts) not only to others but also to our self (Charon, 2007). To quote

Charon:

“Social objects and therefore symbols are socially established and

understood. This means that symbols are defined in interaction, not

established in nature. People make them, people discuss them, people agree

on what they shall stand for. Symbols are conventional, a socially

established use for the purpose of representations. Conventional means that

the symbol is arbitrarily and purposely developed to refer to something” (Charon, 2007, p.48-49).

According to this perspective, symbols are important for the individual to operate or

define meaning of the social object for the person and others that they interact

with. Symbols are also important to manage other people‘s impressions that later

influence other people‘s definitions of situations and their conduct (Dolch, 2003, p.

394).

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Following on from symbolic interactionism, the reality of audit quality is not just

‗out there‘ but must be constructed in the activities of external auditors, AC

members and quality inspectors. Accordingly, the ‗reality‘ of audit quality has to be

signified and communicated using various symbols internally and externally by the

individual actors (for example, professional qualification, audit review, auditing

standards, consultation, audit documentation or audit committee meetings). In this

case, audit quality becomes a symbolic representation of reality that those

individual‘s use to arrive at a certain (satisfying or unsatisfying) degree of comfort

and confidence in the performance of audit delivered by or presented to them in the

situations in which they find themselves.

Symbolic interactionism states that the meaning of a social object can be

understood by focusing on how people interact in a particular situation, and how

the environment may influence their perceptions and actions (Puxty, 1993). As

people are self-reflective, their perceptions and acts are not only caused by forces

within themselves (instincts, drives, needs, etc.), or by external factors (political,

social or economic systems, etc.) but also what lies in between, a reflective and

socially derived interpretation of the internal and external stimuli (Meltzer et al.,

1975). In the case of the audit firm, the influence of commercial activities and

image management of the audit firm as well as the legal, political and social-

economic structures may influence the auditor‘s work performance (Sucher and

Kosmala-MacLullich, 2004; Hudaib and Haniffa; 2009).

The perceptions of people concerning social meaning are also influenced by the role

or expectations of behaviour that are expected by others in their social interaction

(Dolch, 2003, p. 393). It is argued that people perform a wide variety of roles in

different domains of their everyday lives that cause multiple and frequently

conflicting interpretations and meanings of social objects (Gopal and Prasad, 2000,

p. 514). Consider the audit firm: the expected roles of external auditors from other

significant parties such as the regulator, client management and audit committee

during interaction may influence the construction of meaning of audit quality and

related behaviours. It is important to acknowledge that auditors need

simultaneously to satisfy various role expectations from these groups who may hold

competing interests and have different authority. As a result, when there are

differing role expectations, it may create role conflicts for the auditors and have the

potential to affect their performance and the quality that is achieved (Koo and Sim,

1999). The inevitable consequence of this is that any given meaning of audit quality

has the potential to create conflict depending on what others consider to be audit

quality.

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The symbolic interactionist perspective also suggests that the meaning of a social

object can be understood by looking at the process of ‗self-interaction‘, which

focuses on how an individual‘s perceptions, conceptions and communications

about/with themselves influences meaning and action:

“First, the actor indicates to himself the things toward which he is acting; he

has to point out to himself the things that have meaning. The making of

such indications is an internalized social process in that the actor is

interacting with himself. This interaction with himself is something other

than an interplay of psychological elements; it is an instance of the person

engaging in a process of communication with himself. Second, by virtue of

this process of communicating with himself, interpretation becomes a matter

of handling meanings. The actor selects, checks, suspends, regroups, and

transforms the meanings in this light of situation in which he is placed and the direction of his action” (Blumer, 1969, p. 5-6).

In this case, the self-conception of external auditors as a professional occupational

group and their perceptions of a public service oriented audit function that

facilitates the public interest may influence and shape the meaning of audit quality.

Furthermore, the increasing commercialisation of audit practice for profit making

and economic efficiency may influence external auditors meaning of audit quality.

Correspondingly, how the quality inspectors and the AC members view and define

themselves may influence and shape the meaning of audit quality.

In brief, symbolic interactionism emphasises that the perceptions of people

concerning the meaning of a social object can be understood through three

important concepts. First, ‗self interaction‘, in particular self-conception, influences

the construction of the meaning of a social object. Second, the meaning of social

object is influenced by social interaction with others in a particular situation and

other environmental factors, and thus social meaning is influenced by various

internal and external stimuli. Third, acts and objects are used as symbols to

communicate and represent meaning of the social object to self and others. In

applying these concepts for the purpose of this thesis, this study uses interviews, a

survey questionnaire and public documents to understand the range of meanings

and symbols that are shared, communicated and manipulated via the interactions

between the participants in the auditing setting.

This study regards auditing practice as a socially constructed activity and audit

quality is regarded as a social object. Hence, the perceptions and beliefs of

individuals about audit quality are seen as emerging from a complex series of

interactions between various constituents in the auditing environment, and

influenced by various environmental factors such as coercive pressure imposed by

laws or regulation and commercialisation of audit practice that affects the work of

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the external auditors (Humphrey and Moizer, 1990; Nagy and Cenker, 2007). It is

important to note that external auditors do not work in isolation. Therefore, it is

important to understand how the people, processes, and environment that auditors

interact with influence their understanding of the audit task and, therefore, their

performance and, consequently, their perceptions about the quality achieved

(Nelson and Tan, 2005, p. 59). In like manner, changes in the legislation on ACs as

a response to corporate collapses, particularly in relation to external audits may

influence the perceptions of AC members concerning audit quality, and, in

consequence, auditors‘ working practices. In addition, recent changes in audit

regulation have introduced the AIU as a prominent actor in the auditing

environment, which may have a different conception about audit quality, as such,

interaction of external auditors with the AIU may influence their meaning for audit

quality and associated action.

Symbolic interactionism has been applied in auditing and accounting research.

Hudaib and Haniffa (2009) studied meaning of auditor independence in Saudi

Arabia and applied concepts of social interaction, joint action and differential degree

of power in symbolic interactionism. Based on interviews, observations and

document analysis they found that construction of the meaning of independence

was influenced by auditors‘ reflective perspective concerning their reputation and

ethical reasoning. It was also found that commercial activities and image

management of the audit firm as well as political and social-economic structures of

the country influence meaning of independence. Willmott (1986) incorporated

interactionist approach to study the development of the accountancy profession in

the UK. In his historical analysis, he found that the major accountancy bodies play

a significant role and become an important instrument for constructing and

projecting meaning of ‗profession‘ through defining and securing status, value, and

social identity of accountancy profession. Further, the approach identified the

presence of competing interests and tensions between and within the major

accountancy bodies causes by problems of organizational identity and internal

governance as well as disproportional financial and political strength. Preston

(1986) employed participant observation in a single case study of plastic containers

division of large organisational to examine managers understanding of meaning of

production information system. He paid particular attention to symbols - mechanics

and media used in the process of informing (for managers to inform each other and

themselves) and found that media of interactions, observation, personal record

keeping and attending meeting were important in constructing and maintaining

aspects of information processes within an organisation.

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It should be noted that the symbolic interactionist perspective suffers criticism as

interactionist researchers do not rely on the use of strict scientific methods in their

investigation (Athens, 1984). Blumer (1969) stressed that the perspective focuses

on understanding social reality from the perspective of the individual. He argued

that the value and validity of this perspective lies in the direct examination of

people being studied and their own interpretation rather than the ‗objective‘ view of

the empirical social world. The central principle of symbolic interactionism is that it

concerns the understanding of what the actors themselves believe about the world

(Charon, 2007). Therefore, testing hypotheses and defining two or more variables

and testing the causal relationship between them would not capture the perspective

of the individual actors.

The theoretical framework based on symbolic interactionism has been outlined and

is used to help achieve the objective of understanding the focus of this research.

The following section continues to explore the research design and includes a

description data collection and data analysis, which complements the theoretical

framework of this study.

Figure 3.1: Theoretical Framework

Interaction

Meaning

of Audit Quality

Symbols

Role expectations Self-images Regulatory,

economic and societal factors

Acts Objects Words

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3.3 Research Method

This study uses an interpretive approach that requires the use of the qualitative

methods to provide insight into the topic under study. This approach gives an

opportunity to the researcher to investigate the issue of audit quality within its

social, organisational and institutional context in an open and flexible way.

Qualitative methods are thought to be most appropriate, as the issue needs to be

explored in detail from the participants‘ own perceptions and beliefs. Furthermore,

the concepts and variables of the study are difficult to measure and an

understanding of the subject might not be achieved through more structured

research. Patton (2002) mentions that qualitative methods allow examination of a

social issue in an open and comprehensive manner without some predetermined

categories. It also permits the researcher to gather rich information and enhances

the understanding of social phenomena with a small number of people or cases.

Patton (2002, p.4) states that qualitative methods are recognised from three types

of data collection: (1) in-depth, open ended interviews (which yield direct

quotations from people about their experiences, opinions, feelings and knowledge);

(2) direct observation (which involves detailed descriptions of people‘s activities,

behaviours, actions, and a full range of interpersonal interactions and

organisational processes as part of the observable human experience); and (3)

analysis of written documents (comprising studying excerpts, quotations, or entire

passages from organisational, clinical, or programme records; official publications

and reports; personal diaries; and questionnaires and surveys). Consistent with this

view, the data for this study were gathered from written documents, semi-

structured interviews and survey questionnaires. The next section further explains

the data collection and data analysis used in this research.

3.3.1 Research Design

Research design provides a framework for the collection and analysis of data

(Bryman and Bell, 2007). In this thesis, the study of official publications and

reports, semi-structured interviews and survey questionnaires were used to answer

the research questions established in Chapter One. These questions were addressed

using two separate stages of related studies. In the first stage, documentary study

was employed to identify relevant issues in audit quality from the comments

submitted by a wide group of interested parties who responded to the discussion

paper ‗Promoting Audit Quality‘, which was issued by the FRC in 2006. The issues

identified were used in developing an interview guide so that relevant themes were

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covered in the second stage of the study, which involved semi-structured interviews

with audit partners, AC members and quality inspectors. In this way the interview

could be structured around the matters for which there was already some evidence

of their relevance to the understanding of audit quality. An on-line survey

questionnaire was used to complement interview data collected from quality

inspectors as it was not possible to negotiate access to interview a large number of

inspectors directly, due to the sensitivity and confidentiality of their work. The

research design for all of the studies is explained in the following sub-sections.

3.3.1.1 Collection of Data and Analysis of Comment Letters

In 2006 the FRC issued a discussion paper Promoting Audit Quality (FRC, 2006b)

and invited comments from various stakeholders, audit market participants and

commentators by a deadline of 31 March 2007. A summary of the discussion paper

is described in Appendix 1.

The FRC received thirty-nine sets of comments concerning the discussion paper,

which are available as part of the public record and published on the FRC website

(www.frc.org.org/about/promotingauditqualityresponses.cfm). The views expressed

in all the comment letters submitted to the FRC were examined to identify potential

and significant issues that ought to be explored during the interview stage. Detailed

findings from the examination are reported in Chapter 4.

This study is based on a qualitative content analysis of the comments received by

the FRC. Qualitative content analysis is defined as:

“any qualitative data reduction and sense-making effort that takes a volume

of qualitative material and attempts to identify core consistencies and meanings” (Patton, 2002, p. 453).

Qualitative content analysis is an accepted approach of textual investigation to

identify the occurrence, patterns or themes within its specific contexts (Babbie,

2001; Berg, 2006). Zhang and Wildemuth (2009) identify several key differences

between qualitative and quantitative content analysis. Quantitative content analysis

is developed in the research area of mass communication with the purpose of

counting manifest textual elements. Its analysis is deductive in nature with the

purpose of testing hypotheses against an existing framework or theory.

Quantitative content analysis prefers the selection of random sampling or other

probabilistic approaches to ensure the validity of statistical inference. It concerns

producing numerical data that can be manipulated with various statistical methods.

In comparison, qualitative content analysis is developed in the research area of

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anthropology and sociology and aims to understand the underlying meaning of

texts. Its analysis is inductive in nature and involves discovering patterns, topics or

themes in one‘s data. In terms of sample, qualitative content analysis involves

purposively selected texts that relate to the research questions. This approach

produces descriptions or typologies together with expressions from subjects of the

research that reflect how they view the social world.

Quantitative content analysis pays particular attention to the reliability of its

measures but suffers in terms of the validity of the findings. The approach is argued

to be more objective and reliable but fails to understand the deeper meaning of the

text‘s context. In contrast, the main advantage of the qualitative content analysis is

that it increases the likelihood of genuine understanding of the deeper meaning of

the texts. However, the method cannot be easily replicated, is influenced by the

researcher‘s own experience, opinions and background, and suffers from a lack of

detailed numerical information.

As for this study, the objective of this textual investigation is to collect views from

the respondents about various issues related to audit quality. Therefore, qualitative

content analysis is employed to understand the meaning of the data from the

variety of forms of response to the discussion paper.

This analysis is included in Appendix 2 and summarised in Table 4.2. Several steps

were taken in the analysis of the comments:

1) First, the comments were read through twice, converted into rich text

format and imported to NVivo software.

2) Next, a set of themes or categories was developed from the data, which

were then reviewed to ensure all of the issues had been identified.

3) Lastly, each of the responses were reviewed again to identify which

respondents had commented on each of the issues identified and a detailed

analysis of the comments on significant issues by respondents was

prepared.

The FRC report summary of significant issues highlighted by the commentators and

Audit Quality Framework publication following the consultation were also read to

ensure completeness of the issues identified. NVivo was used to code and

categorise the large amount of narrative information, which allows flexible and

efficient coding of the data under themes determined by the researcher. Thus, a

large volume of information is reduced into certain patterns, categories and

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themes, which could be done through the use of diagrams or charts to link the

themes and categories, and link emerging case explanations with available theories

(Ryan et al., 2002). The software also facilitates storage, coding, retrieval,

comparing and linking of data (Patton, 2002, p. 442).

3.3.1.2 Collection of Data and Analysis of Semi-structured Interviews

The first step in designing the interview study was to contact potential respondents

for the study. The first group of respondents was the audit practitioners. Individual

audit partners were identified from the directory of the ICAEW members. The

BoardEx database was used to identify members of the audit committee as the

second group of respondents in the study. The third group of respondents was the

quality inspectors who were contacted personally.

All of the groups of respondents could be regarded as a credible source in relation

to the topic under investigation. These groups are in one way or another involved in

the assessment and achievement of audit quality in practice. For the audit partners,

they are responsible for delivering audits that they consider to be of suitable

quality. Therefore, the issue as to whether they are fulfilling their responsibility in

doing a good job or delivering the quality of audit that is expected by users of the

audit services is relevant. For the AC members, they are part of the important

governance mechanism that is responsible for commissioning, monitoring and

reviewing the effectiveness of external audit function, which protects the interests

of the shareholders through improving audit quality and financial reporting quality.

Thus, the issues as to whether they are fulfilling these anticipated roles are

important. In addition, the issue as to whether the quality that has been delivered

to them is meeting the standards that have been established on behalf of the

shareholders is pertinent. For the quality inspectors they are responsible for

evaluating and monitoring audit quality by way of ensuring audit firm‘s compliance

with the regulatory framework and extent of ‗quality of challenge‘ of the auditors to

the management. Subsequently, the issue as to whether the quality that has been

delivered to them is meeting the standards that have been established on behalf of

the society is relevant.

Thus, the inclusion of these groups in the study is important. It is also worth noting

that a lot of prior research has been done in comparing auditors with other groups

such as management of the audit client and investors. Therefore, simultaneously

comparing audit partners, AC members and quality inspectors is an important

contribution to research on audit quality.

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A total of two hundred potential interviewees (AC members and audit partners)

were contacted by letter on July 2009 (Appendix 3). After the initial contact, ten

individuals agreed and fifteen declined to participate in the study. After three weeks

from the initial contact, follow up letters were sent to encourage participation and

twelve more individuals were willing to participate in the study. Two individual

involved in quality inspection agreed to participate in this study through personal

contacts. The number of individuals who participated in the study is shown in Table

4.1. Patton (2002, p. 244) when explaining about sample size suggests:

“There are no rules for sample size in qualitative inquiry. Sample size

depends on what you want to know, the purpose of the inquiry, what‟s at

stake, what will be useful, what will have credibility, and what can be done

with available time and resources”.

Pertaining to this, the aim of this study is to gain an in-depth understanding or

‗information richness‘ rather than generalisation of the issues. It is also worth

mentioning that time and resources also play a significant factor in determining the

sample size.

Table 3.1: Categorisation of Interviewees

Respondent Number of respondents

Audit partners 11

Audit committee members 11

Quality inspectors 2

The study involved twenty-four semi-structured interviews with audit engagement

partners, quality inspectors and AC members of the FTSE 100 in the UK. Eleven

partners were interviewed within a period of three months (from October to

December 2009). Eight of the interviewees were from Big Four firms and the

remaining three from mid-tier firms. Similarly, eleven AC members, nine of whom

were chairs of the AC, were interviewed during the same period. The two

representatives from quality inspection were interviewed in November 2009. The

interviews took place in several places: London, Manchester, Birmingham and

Leeds. The interviews took place either at the offices of the interviewee or other

places that were convenient to both the researcher and the interviewee. The

majority of the interviews lasted between one hour and one and a half hours.

Several steps were taken to improve the reliability of the data collected in the

interview process. An interview guide was used to provide a consistent framework

and coverage of topics in each interview. All of the interviewees were given

assurances of anonymity in advance of the meeting to encourage open and honest

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responses. All of the interviews were digitally recorded and a few notes were taken

in order to promote an open dialogue on the matters being discussed.

The interview guide, comprising a schedule of open-ended questions, was

developed to ensure that relevant themes were covered consistently with all

interviewees and to ensure appropriate questions to tackle the complex issues in

depth. The interview guide is reproduced in Appendix 4. These themes were:

definition and concept of audit quality, the role of firm culture, regulation,

governance and control, quality of personnel, auditor-audit committee interactions,

independence, and judgement and audit methods. In general, the interview guide

served as a basic checklist to ensure all relevant themes were covered during the

interview. The guide was developed from a review of the professional and academic

literature on audit quality, and also from an analysis of the issues referred to in the

comment letters submitted in response to the discussion paper Promoting Audit

Quality, published in the UK in 2006 (FRC, 2006b). In this way the interviews could

be structured around the matters for which there was already some evidence of

their relevance to the understanding of audit quality held in the professional and

practitioner community.

Patton (2002, p. 343) proposed that the use of an interview guide has the

advantage of allowing the interviewer to decide how best to use the available time

and it improves the consistency of coverage of relevant topics, while leaving the

interviewer free to explore and probe interesting comments and issues that arise in

the course of the interview. Open-ended questions encourage interviewees to

provide a full account of their experiences. This format facilitates the development

of a good flow to the conversation, and a good rapport between the interviewer and

the interviewee.

All of the interviews were transcribed by a professional transcriber, and the

transcripts were then rechecked against the audio files. The transcripts were reread

to improve familiarity with the data. In this particular study, the analysis of data

involved searching and identifying for recurring themes and patterns together with

consistencies and meanings in the information. The initial themes were established

based on the issues covered by the interview guide but were later refined as the

analysis of data progressed and patterns emerged. Three main activities were

performed for the analysis of qualitative interviews data: data reduction, data

display, and conclusion drawing/verification (Miles and Huberman, 1994):

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1) Data reduction encompasses the process of selecting, focusing, simplifying,

abstracting and transforming the data contained in the transcriptions.

2) Data display involves organization, compression and assembly of the

information to support analysis, verification and conclusion drawing.

3) Finally, noting regularities, patterns, explanations, possible configurations

and causal flows are some of the activities that are involved in arriving at

conclusions from the data.

In this way, the qualitative data was subject to careful exploration and rigorous

analysis of themes in order to create a ‗thick description‘ and understanding of the

issues. Again, the computer assisted package, NVivo, was used to assist in coding

and categorising large narrative information collected from the semi-structured

interviews. The detailed findings from the interviews of each group are reported in

Chapters 5 (audit partners), 6 (AC members) and 7 (quality inspectors).

Commonality and differences between groups regarding audit quality issues are

discussed in chapter 8.

3.3.1.3 Collection of Data and Analysis of Survey Questionnaire

The questionnaire was pilot-tested by reference to a senior member of the

inspection unit in order to identify and rectify any weaknesses with an aim to

increase the response rate. The questionnaire was administered through a web

survey between December 2010 and January 2011. The total population for the

quality inspectors was identified as twenty individuals, all of whom were surveyed.

Table 8.1 below provides a summary of the response rates.

Table 3.2: Response Rates for the Questionnaires

Group Total Returned Useable response

rate (percentage)

Quality inspectors 20 12 60%

The questionnaire included 85 statements in five sections in addition to a personal

background section. A full copy of the questionnaire is attached in Appendix 5, and

detailed findings from the various issues investigated are reported in Chapter 7.

The form of questions used in the questionnaire incorporated a five-point Likert

scale for responses. A Likert scale has the advantages of being relatively easy to

construct and administer and is easily understood by respondents, making it

especially useful in surveys (Tull and Hawkins, 1993). The questionnaire consisted

of closed-ended questions. Care was taken in keeping the length of the

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questionnaire reasonable whilst ensuring that it covered all of the important issues.

In the wording of the questions asked, care was also taken in order to ensure that

they were clear and understandable. In addition, statements concerning potentially

sensitive areas were formed with care. The confidentiality of information given to

the respondents was guaranteed in the introduction of the questionnaire.

The questionnaire used in the study was developed after reviewing both prior

literature and the findings from the interviews. The questionnaire consists of six

main sections. The first section includes several personal background questions

related to the respondents. The second section covers the perceptions of quality

inspectors about the attributes of audit quality in practice. In other words, it aims

to understand the quality inspectors‘ conceptualisation of the notion of audit quality

in practice. The third section asks the views of the quality inspectors about the

impact of business, accounting and the auditing environment on audit quality. The

fourth section covers their views on how actual audit quality is achieved, that is, to

understand their perceptions of how audit quality is operationalised and presented

in practice. The fifth section aims to collect information about potential problems in

audit quality in practice as perceived by the quality inspectors based on their

assessment of work of the external auditors. The final section collects views of the

quality inspectors about the actual level of audit quality in practice.

Descriptive statistics analysis such as central tendency and dispersion of the data

(median and mean) are used to present the results of the data collected from the

survey questionnaire. Although good proportionate coverage of the quality

inspector group is achieved in the study, it is still a relatively small number of

responses. As a result, more detailed statistical analysis or testing (such as

differences within the sample) is restricted.

3.4 Summary

This chapter has outlined and described the methodological and theoretical

approach undertaken to examine the perceptions of auditors, AC members and

quality inspectors concerning the meaning of audit quality in practice. It has

attempted to explain how and why the research was carried out in a particular way.

This study has applied an interpretive approach that is concerned with

understanding the social meaning of audit quality. The study used symbolic

interactionism as an analytical tool to understand the meanings of audit quality as a

social object that are formed by the interactions of people in the auditing

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environment, and which subsequently influence their action. This chapter describes

two stages of qualitative studies to answer the concerns of the research. The

qualitative research approach provides a new insight about issues concerning audit

quality. The approach also offers rich description and flexibility to understand the

societal, organisational and institutional factors that might affect audit quality.

In the remaining parts of the thesis, chapters 4, 5, 6 and 7 present the empirical

results of the study. The next chapter begins by describing the results of the

analysis of the textual study, as a backdrop to ensure that issues relevant to the

study were covered in the interviews.

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Chapter 4

Audit Quality in Practice - The FRC Discussion Paper

4.0 Introduction

This chapter presents the analysis of responses to the discussion paper Promoting

Audit Quality published in the UK in 2006 (FRC, 2006b). Reporting upon the

analysis of responses, the objective of this study is to analyse views from the

respondents about various issues related to audit quality. This study constitutes of

how subject of audit quality is seen in practice and as influence in work carried out

in second stage of the research that reported in subsequent chapters. The chapter

is set out as follows: section 4.1 briefly describes the FRC discussion paper exercise

and the justification for its inclusion in this study; section 4.2 presents an analysis

of the comments on the discussion paper; section 4.3 presents key issues from the

analysis of the comments and draws out areas for further investigation in the

subsequent study, which will be presented in the following three chapters. Finally,

section 4.4 provides a summary of the chapter.

4.1 Introduction and Justification for the Documentary Study

In November 2006, the FRC published a discussion paper on promoting audit

quality (FRC, 2006b) and invited comments from interested parties by the 31 March

2007. While responses were invited on any aspect of the subject, the FRC sought

answers to seventeen specific questions that relate to five main drivers of audit

quality:

i) culture within an audit firm,

ii) skills and personal qualities of audit partners and staff,

iii) effectiveness of audit process,

iv) reliability and usefulness of audit reporting, and

v) outside factors beyond the control of auditors that affect audit quality

such as the approach taken by management and the contribution made

by the audit committee.

The text of these questions is reproduced in Appendix 1 and analyses of the

responses to the specific questions are included in Appendix 2 to the thesis. Thirty

nine sets of responses were received in response to the discussion paper: eight

from audit firms, ten from professional bodies, nine from institutional investors, two

from the corporate sector and ten from other interested parties (Table 4.1). Of the

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eight sets of responses received from the audit firms, four were received from the

Big Four and four from middle tier firms. Of the ten responses received from the

professional bodies, eight were from bodies in the UK or Ireland and two from

South America.

Table 4.1: Respondents to the Discussion Paper

Respondents Number of responses

Audit firms

Professional bodies

Investors

Corporate

Others

8

10

9

2

10

The FRC subsequently published all of the responses on its website

(http://www.frc.org.uk/about/promotingauditqualityresponses.cfm). The text of all

thirty nine responses was analysed as the basis for this study. Appendix 2 includes

a list of respondents, together with an analysis of their responses to the specific

questions posed by the FRC and other significant issues identified in the comments.

Table 4.2 provides a summary of the significant aspects of the detailed analysis in

Appendix 2. A report published by the FRC in October 2007 that summarises

significant issues of the responses and Audit Quality Framework publication

following the consultation was also read to ensure completeness of the issue

identified.

The responses to the discussion paper were generally structured around the specific

questions posed by the FRC. The structured nature of the discussion paper with its

seventeen questions, determined in most cases the structure and content of the

responses received. It could be argued that more meaningful responses could have

been elicited using a more open-ended approach. However, respondents are not

obliged to structure their answers in a particular way, and any very strong feelings

about the issues under review would have been likely to emerge regardless of the

structure. As such, the respondents made a significant number of additional

comments in their covering letters or response pages.

A number of limitations need to be noted regarding the nature of the documentary

evidence. These include the fact that public statements may not capture full picture

on privately held views, subjectivity in responses and self selection in population of

those who responded. Nonetheless, comment letters submitted to the discussion

paper still represents a significant available source of evidence on audit quality as

http://www.frc.org.uk/about/promotingauditqualityresponses.cfm

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the collection of view expressed by a wide group of interested parties and therefore

worth analysing.

In order to understand how subject of audit quality is seen in practice the approach

to the analysis is to go beyond counting comments or score points as a means of

drawing conclusions but also to identify certain key themes that consequently

influence on work reported in subsequent chapters.

The issues referred to in comment letters, together with a review of the

professional and academic literature on audit quality, also served an important role

in this study as a basis for developing the interview guide so that relevant themes

were covered during the interviews. In this way the interviews could be structured

around the matters for which there was already some evidence of their relevance to

the understanding of audit quality held in the professional and practitioner

community.

Table 4.2: Analysis of Significant Responses Received by the FRC on the

Discussion Paper Promoting Audit Quality

AF PB II C O

Total number of respondents 8 10 9 2 10 Key Issues of the Comments

The Culture of the Audit Firms

Concern about tick box mentality culture 5 4 0 1 1

Concern about focus on documentation 4 2 0 0 0

Concern about commercialisation of the audit firm 0 0 3 0 1

Suggest professionalism as part of culture of the audit firm

0 0 4 0 0

Sought greater information about governance and

control of the audit firm

0 2 7 0 1

The Quality of people

Diverse and up to date skills and knowledge 8 5 7 1 5

Concern about attractiveness of the profession 7 1 2 0 1

Concern about availability of audit staff 7 5 0 0 0

No fundamental review of the qualification and training requirements

4 5 3 0 0

Concern about requirement of partner rotation 3 1 0 0 0

The Effectiveness of the Audit Process

Concern about excessive and/or overly complex audit standards and regulations

7 6 1 1 3

Concern about move to compliance/prescriptive audit approach

7 5 3 2 2

Regulators should promote and enhance principles based audit approach

5 6 2 2 0

Important role of audit client to audit process 7 6 5 1 2

Important role of audit committees to audit process 7 6 4 1 1

AF – Audit firms PB – Professional bodies

II – Institutional investors C – Corporate O - Others

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Table 4.2: Analysis of Significant Responses Received by the FRC on the

Discussion Paper Promoting Audit Quality (continued)

AF PB II C O

Total number of respondents 8 10 9 2 10 Key Issues of the Comments The Reliability and Usefulness of Audit Report

Reputation of audit firm and audit profession 2 3 1 1 1

Greater information from audit firm 2 1 5 0 1

Understand ability of audit report 1 2 5 0 1

Other Factors Affecting Audit Quality

Important role and support of the management 7 2 0 0 0

Important role and responsibilities of audit committee

7 6 7 1 1

Audit committee discharging adequate

responsibilities

4 1 3 1 1

Sought detailed guidance for audit committees to evaluate effectiveness of audit

3 3 2 1 4

Sought summary of work of audit committees in annual report

7 4 1 0 5

Other Issues

Welcomes references to discussion paper 8 10 8 2 6

Concerned about lack of empirical evidence to support some of the assertions

3 3 5 0 0

Insufficient attention to other critical dimensions of audit quality

6 4 1 1 0

Resource concern 5 5 1 1 1

Concept or definition of audit quality requires

clarification

0 1 0 1 0

AF – Audit firms PB – Professional bodies

II – Institutional investors C – Corporate O – Others

4.2 Comments on the Discussion Paper

This section outlines findings from the analysis of comments letter to the discussion

paper. As noted earlier, the discussion paper is structured around five major drivers

of audit quality. This section is organised according to that structure together with

other issues that emerged from the analysis. The detailed discussion will be

presented in subsequent sections.

4.2.1 Audit Firm Culture

In general, respondents agreed that the culture of the audit firm was an important

driver for audit quality. Auditors, investors, professional bodies and companies all

made similar comments on this point. They viewed the indicators identified by the

FRC such as leadership, auditing and ethical standards, promotion of consultation,

partner and staff development systems, and information infrastructure as essential

to achieve high quality audits. For example, RSM Robson Rhodes observed that:

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“We consider that these are important indicators of a strong quality culture.

In particular, in our view, it is the effectiveness of partner leadership on

quality matters (the “tone at the top”) combined with the cascade of this through the business, which underpins a quality culture within the firm”.

Similarly, an institutional investor, Electricity Pensions Services Limited, recognised

that technical competence, risk management and staff training were an essential

part of the quality culture in the audit firm. A professional body, the ICAEW,

emphasised the significance of good technical support and that the culture of

leadership throughout the audit firm that drives audit quality.

While accepting the importance of culture to audit quality, most of the audit firm

respondents were keen to describe concerns and problems about the changing

culture in the audit firm created by the current regulatory framework. Eleven

respondents claimed that the changes have diverted audit firms‘ attention from the

principles to rule based procedures that could create a culture of a ‗tick-box‘ or

compliance approach in audit. The compliance approach has also created an

excessive focus on documentation that could reduce the use of knowledge and

professional judgement in the conduct of the audit. The respondents argued that

the prescriptive approach was restricting the auditor‘s ability to exercise

professional judgement, shifting the nature of the audit to compliance work,

thereby affecting the quality culture of the audit firms and impacting the

effectiveness of the audit process. These eventually would undermine the quality of

the audit.

“The approach of the regulator has a direct effect on the culture of an audit

firm and a relentless focus on documentation will drive a culture in the audit

firms that detracts from evidence gathering and making judgements” (PWC).

“Rules based, rather than principle based, auditing standards could result in

a tick box mentality to auditing” (KPMG).

“We consider that having an overly complex financial reporting regime can

have a detrimental impact on audit quality as it can mean that partners and

senior staff spend too much time on accounting issues or in preparing

documentation for the benefit of regulators. We understand that this has

been an increasing problem for firms” (ICAEW).

In consequence of the culture, it was frequently claimed by a number of the

investor respondents that commercial interests have become a major aspect of the

culture of the audit firms and could compromise the audit quality. For example, the

Association of British Insurers voiced concern about the commercial objectives of

the audit firms that could create a threat to audit quality. Similarly, its counterpart,

the Investment Management Association opined:

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“We consider that one contributory factor in recent years to a decline in

audit quality is the way firms have tended to shift to a more aggressive, commercial business model”.

Further, four investors suggested that the audit firms should promote and

encourage culture of professionalism - an audit that serves the public interest for

the benefits of shareholders and other users of the accounts as part of the

indicators of their quality culture. Eight respondents advocated that greater

information about quality initiatives and the governance and control of the audit

firms could enhance their confidence in the quality culture of the audit firm. In

general, the respondents highlighted the lack of information about audit firm‘s

policies and actions that they take to embed a culture of quality within the firm.

“Fostering of reputation is a prerequisite for long-term success in a properly

competitive business environment. In the case of accountancy firms the

quality and professionalism of what should be seen as the core discipline,

that of audit, is key. It is disappointing how little prominence some of the

largest accountancy firms give to their audit business in the way they

present themselves to the outside world” (ABI).

“...way of demonstrating to their ultimate paymasters, the shareholders,

that they are providing a valuable service” (Hermes Investment

Management).

Overall, the majority of the respondents agreed that within the context of the audit

firms, culture is imperative and will influence the quality of audit practice. The user

group representative, that is the investors mentioned great concern on culture of

commercialisation of audit firm that could undermine audit quality. The audit firms

and professional associations draw attention on negative effect of the audit

regulation to the culture of the audit firms.

4.2.2 The Quality of People

Almost all of the respondents fully agreed with the importance of the auditor‘s

knowledge, skills and personal qualities of the audit personnel for attainment of

high audit quality. Investors, auditors, companies and professional bodies all made

similar observations on this point. Similarly, investors such as the Investment

Management Association and the National Association of Pension Funds pointed out

the necessity for auditors to keep their technical skills up to date with to the

changes in the business environment. Likewise, a professional body respondent,

ICAI, believes that technical skills, personal qualities, professional scepticism and

practical experience are key drivers of audit quality.

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The audit firm respondents asserted it is important for the auditors to have diverse

and up to date skills, and sufficient experience. These attributes are important in

supporting professional judgement and an effective audit process during the

conduct of the audit. As such, the audit firm respondents emphasised the

importance of academic qualification, entry and selection requirements, and

training procedures in the audit firm to advance the knowledge and skills of

auditors to achieve high audit quality; quality audit judgement.

“...this gained from the ability to work on a wide variety of companies; gain

experience from a wide range of disciplines (from audit to tax to transaction

services); and the undertaking of a rigorous set of exams for the audit

qualification. To undertake high quality audits in the context of current and

evolving business practices and accounting standards, it is particularly

important that audit firms have available (and under their control and

subject to their quality control processes) a sufficiently broad range of

technical skills including information technology, taxation, valuation and actuarial skills” (KPMG).

In relation to the skills, the audit firms and the professional bodies frequently

stressed points concerning the potential adverse impact of the current regulatory

environment on the quality of people in the audit firm. They argued that complex

accounting rules and auditing standards, and the check-list audit approach resulted

in changing the nature of audit work to a more compliance based activity that had

an unfavourable impact on the attractiveness of the profession to hire and retain

quality audit staff. In addition, intrusive audit regulations, imbalanced reviews by

the regulators and the threat of litigation reduce the attractiveness of the

profession to attract and retain quality audit staff.

“Whilst the profession continues to attract high quality graduates, the

attractiveness of the profession appears to be declining as evidenced by

decreasing job satisfaction, brought about at least in part by increased

regulation. Remaining in the profession post-qualification is becoming a less

attractive option partly as a result of the amount of compliance-type work

carried out during the training contract. Unless the best people see audit as

an interesting, profitable and safe environment they will not join it and no

amount of “tone from the top”, training and information infrastructure will overcome that fundamental weakness” (ICAEW).

“There are concerns that the attractiveness is being impacted by: the overall

reputation of the audit profession, complex accounting rules that involve a

check list approach to review, an increase in accounting rules rather than

principles, and regulators that place too much emphasis on the application of the rule rather than principles” (KPMG).

Another issue that was voiced by some of the respondents was related to the

requirements for partner rotation. Some of them believed that the requirement for

partner rotation of every five years might not contribute to audit quality because

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longer tenure will help build greater expertise and experience required for complex

and high risk audit clients. These views were supported by the major professional

bodies and audit firms.

“We support audit partner rotation, although we question the need for the

five year rotation period that applies in the UK. ....the impact of the audit

partner‟s ability to build sufficient trust with management, such that the

audit team is passed the information that they need, or that the audit

partner does not develop detailed knowledge of the business and its risks for the audit to be effective” (Grant Thornton).

“Audit quality could be enhanced for large, complex multinational clients if

the period of rotation was 7 years rather than 5 years since it can take a

considerable period of time for a partner to fully understand the client‟s business and complexities” (KPMG).

However, while accepting that skills and experience are fundamental drivers of

audit quality, the majority of the respondents objected to a fundamental review of

the qualifications and training requirements for auditors. The respondents

expressed the view that the current qualifications and training requirements are

sufficient and appropriate.

Overall, the majority of the respondents in this area support on the important of

quality of people on audit quality. Analysis of the responses shows respondents

were inclined to highlight concern with unfavourable impact of current regulatory

environment to expertise and judgement of the auditors.

4.2.3 The Effectiveness of the Audit Process

The FRC asserts that factors such as characteristics of the audit team, technical

support, audit methodology, auditing standards and quality control procedures

contribute to the effectiveness of the audit process. Analysis of the responses

shows that the respondents were fully in accord with the assertions. The majority of

the respondents also emphasised the important role of the audit client and audit

committees for an effective audit process. Other factors that influence the

effectiveness audit process include application of business risk audit approach in an

audit and experience of the audit partners.

“We think that the paper identifies most of the factors that contribute to an

effective audit process. However, we would add to these the relationship

that an auditor has with the board of directors, the audit committee, the

financial management and elements of the operational management. A

close, robust and challenging relationship with these parties will improve the

effectiveness of the audit. A distant, difficult and uncooperative relationship

will create significant barriers to audit quality” (PWC).

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“We are concerned that too much regulation risks auditors becoming overly

mindful of compliance with process, which may detract from the thoughtfulness of audit work that is required” (PWC).

Eighteen respondents expressed deep concern about the effect of excessive and

overly complex standards and regulation that shift auditing from principles to rules

based approaches. As a result, some respondents believed that as the audit

approach becomes more prescriptive that promotes compliance exercises rather

than the use of professional judgement, and that this would significantly affect the

effectiveness of the audit process and the overall assessment of the financial

statements, thus delivery of high audit quality. In response to that issue, fifteen

respondents took the view that, regulators should promote and support the

principles based audit approach in their initiatives and projects in the audit arena to

ensure high audit quality.

“Audit effectiveness and quality will inevitably suffer if auditors are faced

with an increased administrative burden in order to demonstrate compliance

in a regime that is in danger of becoming essentially rules-based with little

or no tolerance for the exercise of professional judgment” (ICAI).

“The FRC and its operating bodies have a crucial role to play in shaping

these developments, for example in liaising with the European Commission

and other regulators, and in making the case for the importance of

principles-based standards and the use of professional judgement. More

work might be needed on the nature of professional judgement which is

distrusted by some non-UK regulators but which we believe is crucial to high

quality audit work, and therefore needs to be better understood

internationally” (ICAEW).

Overall, one pertinent issue that emerged from the analysis concerning the

effectiveness of the audit process is in relation to impact of various factors such as

regulation, audit client, audit committee, individual auditors and firm‘s policies and

procedures on the effectiveness of the audit process to achieve audit quality.

4.2.4 The Reliability and Usefulness of the Audit Report

The FRC identified reliability and usefulness of audit reporting that command

confidence as one of the key drivers of audit quality attracted many comments from

the institutional investors. Analysis shows that the respondents generally viewed

concept of audit quality is closely linked to the accuracy and credibility of the audit

opinion that enhances quality of financial statements. As such, they suggested that

the audit report should be accurate and the auditors should be seen as an

independent professional entity. For example:

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“The judgment of the auditor in confirming truth and fairness of financial

statements may, in turn, make important demands on both his professional

faculties and integrity. This process is key to ensuring audit quality” (Association of British Insurers).

“The value of the audit opinion is strongly linked to the usefulness of the

accounts” (Coal Pension Trustee).

Some other comments that put forward by the commentators concerning factors

that affecting confidence on audit opinions include greater information from audit

firms regarding their process and policies, and reputation of audit firm and audit

profession. In comparison, some of factors that identified could reduce confidence

in audit opinion are related to format of the audit report (length and legalistic

wording) and prescriptive audit approach in audit.

4.2.5 Other Factors Affecting Audit Quality

On the whole, the respondents supported the significant contributions made by the

management of the audit client and audit committees to audit quality. The London

Society of Chartered Accountants, for instance, pointed out the important role of

the audit client for audit performance. Similarly, audit firms identified that the

culture of the audited company and the skills and personal qualities of its board and

executive management could enhance the effectiveness of the audit process.

“The culture of the audited company and the skills and personal qualities of

its board and executive management are very important drivers of audit

quality” (EY).

“...to these the relationship that an auditor has with the Board of Directors,

the audit committee, the financial management and elements of the

operational management. A close, robust and challenging relationship with

these parties will improve the effectiveness of the audit” (PWC).

In a similar manner, other respondents such as Deloitte, the ICAEW, Investment

Management Association and Confederation of Business Industry recognised the

important role and responsibilities of the members of audit committees for audit

quality. There was a consensus among the audit firms that the important role of

audit committee in the auditing and financial reporting process. PWC noted that

based on their experience the audit committees had become stronger and more

questioning of what auditors do. Deloitte observed that the recent regulatory

changes have resulted in increased communication between the auditors and audit

committees. The audit firms also acknowledged the influence of the audit

committees on the culture and conduct of their audit. Several audit firms also

stressed the important role of the audit committees in enhancing the confidence of

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the users of financial statements. These were illustrated by the following

quotations:

“The responsibilities audit committees have undertaken in relation to the

audit process can give confidence to shareholders that the auditor/client

relationship is sufficiently independent and that sufficient attention is being

paid to audit quality” (Deloitte).

“Enhancing the direct disclosure between audit committee and shareholders

and/or making the formal communication between auditors and the audit

committee more readily available, would go some way to improving

confidence in the audit opinion” (BDO).

“...we also recognise the very important role of the audit committee in being

involved and overseeing relationships between companies and their auditor,

and in monitoring the company‟s financial reporting and internal control

systems and the audit process” (Confederation of Business Industry).

As a result of the function of the audit committee, the majority of the respondents

agreed that the committees discharge adequate roles and responsibilities in relation

to the audit. The audit firm respondents acknowledged the increasing quality of

communication between them and audit committees. Further, they recognised the

critical role performed by audit committees in the auditing and financial reporting

process. The audit firms, in general, suggest that additional dialogue between the

audit committee and shareholders would enhance confidence about the audit

profession. They also believe that detailed evaluation of audit guidelines would

assist audit committees to function more effectively. On the other hand, investors

requested more disclosure about the work performed by audit committees that

enhances users‘ confidence on audit quality.

4.2.6 Other Issues

In general, the respondents expressed a high degree of support for the initiative

and the audit quality framework proposed by the FRC. In particular, almost all

respondents were in favour of the attempt of the FRC to recognise a broad set of

significant issues relating to audit quality through identification of drivers and

threats that could enhance and undermine the audit quality. It is clear that the

discussion paper succeeded in recognising wider factors that may influence audit

quality in practice. Opinions often emerged as part of the covering letters attached

by the respondents. A number of respondents commented on the positive effects of

discussion paper in promoting and ensuring confidence in the value and quality of

audit opinions. Some of the respondents commented on the positive contribution

the discussion paper made, which enhanced their understanding of the complex

topic in a systematic way. Others indicated that the discussion paper provided

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constructive input to understand better what constitutes audit quality in practice.

For example:

“We support the contribution of the paper to achieving greater and more

consistent understanding of audit quality, and we consider the paper has

successfully identified the principal drivers of quality” (PWC).

“We believe the discussion paper generally draws together the relevant

issues surrounding audit quality” (CBI).

While acknowledging the positive contribution of the discussion paper, some

respondents expressed adverse comments. For example, a few respondents

referred to the lack of relevant and empirical evidence to support the assertions

stated in the discussion paper. For instance, the comments of the CBI and KPMG

included the following:

“There is also a need to underpin and inform any future review with

appropriate supporting evidence or research, which is lacking in the current

discussion paper...an assessment of the relative importance and

completeness of the indicators identified would benefit from some relevant

empirical data” (CBI).

“In some places the FRC discussion paper implies that there are significant

concerns with audit quality. We do not consider that these are supported

with sufficient research or evidence” (KPMG).

Three of the audit firm respondents had significant criticisms of some of the threats

to audit quality identified in the discussion paper. For example, one of the audit

firms pointed out that some of the factors that were identified as threats to audit

quality were unsubstantiated because of a lack of concrete evidence that it would

have an adverse effect on quality:

“A number of issues have been identified that could be threats but the paper

seems to imply that they are threats. We do not see that there is any

evidence to suggest that there is a flaw in the „pyramid structure‟ or in the

training provided. Partners and managers are heavily involved in the key

risk areas of an audit and staff members are adequately briefed, trained and

supervised on the roles that they are assigned to” (KPMG).

The audit firm respondents also argued that the discussion paper failed to recognise

the commitment of the audit firms to the quality of audit. For example, PWC noted

that the discussion paper fails to appreciate the very real interest that audit firms

themselves have in obtaining the highest quality. The respondents also expressed

deep concern about further proposed regulations that might result from the

discussion paper. Twelve respondents took the view that although the framework

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had identified the main drivers of audit quality, it failed to recognise other critical

drivers such as auditor independence and audit regulation.

“Our overall view is that it is a well timed and considered discussion paper in

the light of the continuing need to ensure confidence in the value and quality

of audit opinions. What is less clear is how the feedback you get will be

used; however, from this firm‟s perspective we would wish any approach

derived from this to be measured, and not to result in the further creation of

more prescriptive standards; there needs to be some time given to bedding

down the large number of new auditing and financial reporting standards implemented over the years” (BDO).

“However, we believe that you have missed one key driver, the impact of

regulation. Whilst this is highlighted in a number of areas (especially in

chapter 7) it has not been highlighted as one of the main drivers” (KPMG).

“Qualities of independence in the audit and the auditor are crucial but this is

a dimension that receives insufficient attention in the paper” (ABI).

Overall, most of the respondents welcomed the initiative and project in the audit

arena in the name of understanding and enhancing audit quality. However, there

are limited comments from the respondents that provided any detailed analytical

assessment of the concept and definition of audit quality. Only two of the

respondents to the discussion paper sought clarity about the definition of audit

quality. For example, the corporate respondent, The Hundred Group of Finance

Directors suggested that audit market constituents such as auditors and audit

committees should define more clearly the meaning of audit quality by providing

qualitative and quantitative measures that could be used to assess the quality of

the audit.

Another respondent, the ICAEW, raised concern about the imbalance in the

definition of audit quality and its drivers as proposed by the FRC. The professional

body claimed that current work in the audit arena focuses too much on the

regulators rather than the broader view of the definition of audit quality. They

proposed four broad perspectives on the definition of audit quality. These were i)

market quality – quality in the eyes of principal stakeholders; in the case of

shareholders as a class this arises from the stewardship role, but there are also

other external stakeholders who might use information for decisions and this

element of quality should aim to satisfy the public interest in the audit; ii) service

quality – quality in the eyes of client management and those charged with

governance; iii) operational quality – from the firms‘ perspective in order that the

provision of audit services is sustainable; and iv) compliance quality – quality in the

eyes of regulators, notwithstanding the regulators‘ clear interest in market quality

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and the interest that they should arguably also have in service and operational

quality.

Issues relating to the effect of changes in audit regulation were significant features

of almost all responses to the discussion paper. Although the changes are aimed at

enhancing audit quality, several of the respondents expressed adverse opinions.

Thirteen respondents mentioned resource concerns arising from the current audit

regulations. For instance, five of the audit firms referred to the increased time and

cost needed to fulfil various regulatory requirements. Increased oversight activities

have caused additional workload for the audit firms because more staff are needed

to spend time in meeting the regulatory requirements. For example:

“...many ISAs are unnecessarily detailed, prescriptive and inflexible. Thus

there is a significant risk that they could result in additional costs to firms

and their clients (particularly smaller entities) without any corresponding

improvement in audit quality” (IMA).

“Rapid change in auditing and reporting standards with the corresponding

oversight requires internal departments of audit firms, who [are] responsible

[for] training, quality and risk management, to make, on occasions,

significant demands of audit teams. These teams then have to spend more

time completing documentation and compliance forms. This can create an

extra challenge to delivering audits and, for some, additional pressure” (EY).

“There are now significant pressures on audit firms to complete audits as

quickly as possible to meet various reporting deadlines imposed on

companies. In addition, major changes in requirements of regulatory

standards, applicable to audits and audit firms of all sizes, have resulted in

auditors spending a large quantity of their audit time demonstrating

compliance with such standards. This ultimately has the potential to have a

negative impact on audit quality” (ICAI).

The above statements manifest the changes in regulation that have created

additional tasks for the audit firms. The firms need to stretch their resources to

meet the regulatory and clients‘ requirements as well as to fulfil other stakeholders‘

needs. The respondents voiced significant concerns about the availability of staff to

perform the additional work demanded by the current regulations. Analysis

suggests staffing and cost becomes a major concern to the firm. In the light of the

ongoing debate about the benefits of new regulation, it seems worth investigating

the costs and benefits of the oversight function to audit firms and overall audit

quality.

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4.3 Questions for Consideration

This preceding discussion has reported a documentary study based on the thirty-

nine responses submitted to the discussion paper Promoting Audit Quality published

by the FRC. The chapter presents a snapshot of a small part of the audit quality

debate, through the eyes of those who responded to the discussion paper. This

study did not intend to draw specific generalised conclusions about the research

topic from these responses but, the study was felt necessary to provide an

additional information source to draw out areas that are potentially relevant for

further investigation and that can enhance our knowledge about audit quality in

practice. A number of questions and areas for further investigations arise from

analysis of the data and are discussed in this section.

Interpretation and Understanding of Term of Audit quality

The discussion paper proposed a framework of audit quality that comprised of

drivers and threats but without a clear definition and concept of the audit quality.

While there may be advantages to understand the term audit quality based on its

drivers and threats, however, the relationship between audit quality and the factors

in the new audit environment remains unclear. While questions of how audit quality

is defined and understood by professional practitioners are indeed important

(Schroeder et al., 1986; Carcello et al., 1992; Duff, 2004), analysis of the

responses draws attention to the lack of a practitioners‘ construct of the meaning of

audit quality. The expression ‗high audit quality‘ featured in the responses but its

meaning is unclear. What is audit practitioners understanding of audit quality and

its impact on the audit performance? The meaning of the term of audit quality

remains implicit rather than clearly articulated. The practitioners said relatively little

about ‗true quality‘ or ‗technical‘ definition of audit quality in terms of what it

means. They had more to say that they being committed to have high quality that

relate to issue such as expertise, skills, professional judgement and culture of the

audit firm.

Audit quality is a concept that needs to be clearly understood, thereby allowing

greater understanding of the link between the meaning of audit quality and

auditors‘ evaluation and delivery of quality work. Similarly, understanding of the

term of audit quality from the perspective of other audit market constituents such

as audit committees and quality inspectors may provide further evidence on their

role in commissioning and evaluating what sort of audit is delivered to them and on

behalf of society.

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The Commercial Culture of the Audit Firm

Identification of culture as one of the key drivers of audit quality may indicate

considerable concern for the regulator concerning ‗commercialised professionalism‘

that promote a culture of client-centred services (Hanlon, 1994) that may be

viewed as detrimental to audit quality. As the AIU (2006, p. 13) points out,

commercial considerations and measures continued to be a driver of performance

measurement in the audit firm rather than audit quality. The investor respondents

in this study voiced concerns regarding the commercial business approach of the

audit firm that had contributed to decline in audit quality in recent years. In like

manner, some prior research has shown deterioration of the culture of

professionalism causes conflicts in values and practices within the audit profession

that affect audit performance (Wyatt, 2004; Baker, 2008).

Previous research in auditing examining the impact of culture on audit quality is

relatively scarce. There is a lack of understanding of what culture means for the

auditors and how it relates to audit quality. In addition, there is insufficient

information concerning how culture is measured or is capable of being monitored in

the firm. Finally, it is unclear how the current auditing environment negatively

affects the culture of the audit firms as claimed by the respondents to the

discussion paper issued by the FRC. Recent corporate scandals have called into

question whether accounting firms have nurtured cultures that emphasize an

appropriate level of professionalism and commitment to serving the public interest

(Jenkins et al., 2008, p69).

Expertise and Professional Judgement

Quality of people – expertise and professional judgement is the traditional sphere in

auditing. Central to this claim, the audit firms and professional bodies argued that

the changes in audit regulation may bring a threat to that core value of the audit

profession. In general, analysis of responses highlighted concern of the respondents

on the impact of the changes in the audit regulation that may devalue of a core

area of expertise through and argued that changes in the nature of audit practices

that more to do to tick box approach in audit performance are detrimental to

professional judgement. While accepting potential negative impacts of the changes

in audit regulation on the quality of people, the responses provided by the audit

firms and professional bodies can also be seen as an important defence against the

imposition of more prescriptive regulations that may be detrimental to market

dominance, power and social status, and jurisdiction of their work. Analysis of

responses showed there is a considerable tension around regulation and concern of

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the audit firms concerning further regulation that might be proposed as a result of

the debate around the discussion paper. Given this context, responses from audit

firms on this issue can be viewed as an objection towards development in the audit

regulation and eventual independent oversight and direct regulation of the audit

profession. As such, an emphasis on expertise and professional judgement is

entirely to be expected as it reflects an aspect of firm self interest. Attributes of

professional claims to special knowledge and expertise are necessary to sustain and

legitimate professional status and the related social and economic rewards

(Richardson, 1987). For this reason, professionalism often involves a traditional

stance against regulation.

Overall, professional audit firms always emphasised the importance of quality

people to audit quality. Does emphasis on this give firms more freedom to argue

they have good quality? Clearly, it is much more difficult for the regulators to

regulate ‗individual quality‘ or to measure the quality beyond the threshold of

qualification and experience. Could focuses on professional judgement through the

quality of individuals relate to certain regulations that they found constraining to

the profession? The audit firms also suggested the important of the selection and

training procedures in the audit firm to advance knowledge and skills of the

auditors to achieve high audit quality. One of the limitations with this explanation is

that it does not explain how the quality of people is used in controlling perceived

and actual audit quality. Further, what sort of skills or professional behaviour that

are promoted by the audit firms towards achievement of audit quality in practice?

In relation to the quality of people, one significant issue that emerged from the

analysis of the responses is the importance of auditors‘ professional judgement in

maintaining and promoting high audit quality. Hatherly (1999, p.54) describes

professional judgement as the interaction of the individual auditor‘s reasoning

facility, experience, personality traits, and internal and external factors in the audit

environment. For example, auditors need to decide what is considered as

‗appropriate‘ and ‗sufficient‘ audit evidence to support the audit opinion. They are

also interacting with other members within the audit firm and with the other key

participants in the auditing system and this may influence their judgement. One

question that needs to be asked is: if the quality of audit does depend

fundamentally on the auditors‘ professional judgement, what effects do changes in

audit regulation and interactions with other key participants in the auditing system

have both on auditors‘ professional judgement and overall audit quality? Another

issue that needs to be addressed is whether the emphasis on professional

judgement provides a platform to object to direct-regulation of the profession and

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demand more freedom for the profession? Moreover, what are the implications of

the changes (regulation of the auditors that is independent from the professional

bodies) for audit quality? Traditionally, the quality and consistency of audit

performance has been assessed by fellow professionals.

The Role of Audit Committee

This study has shown that most of the commentators acknowledged the important

role of AC as part of key participants in the audit process and audit quality. This is

in line with the changes in the corporate governance framework – the UK Corporate

Governance Code has now outlined more explicit responsibility of the AC in

overseeing external audit function and evaluating audit quality. The new framework

has also put greater emphasis on the importance of communication between the

external auditors and the AC towards the achievement of audit quality in practice.

Prior research shows mixed results concerning the effect of audit committees on

audit quality (Carcello & Neal, 2000; Abbott et al., 2003a; Abbott et al., 2003b; Lee

& Mande, 2005; Piot & Janin, 2007). Further, these archival studies failed to

document the processes involved between the auditors and audit committees

members and its impact on audit quality. Hence, this provides an opportunity to

investigate further how audit committees understanding of the concept of audit

quality influence their operation and process and its effect on audit function and

audit quality in the new auditing environment.

The Role of Regulation and Discussion Paper

The audit firms and professional bodies tended to view regulation as one of the key

drivers for audit quality, but on the other hand they also mentioned regulation is

complex to deal with and potentially undermines audit quality. This shows some

internal inconsistency or contradiction from the respondents and leads to questions

as to the extent to which this kind of submission and document represents an

expression of ‗true feeling‘ and the extent to which it is a kind of political response.

Therefore, it is important to note that the nature of documentary records is not

purely a set of objective comments; it is part of a participatory process in which the

participants that is the commentators have self-interests and motivations. Their

responses would be aligned to their self-interest, particularly the audit firms but

also other interested parties. Does the content of the responses carry real weight or

is the process of discussion more important as a way of managing the credibility

and legitimacy of various participants in the auditing setting?

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4.4 Summary

One of the more significant findings to emerge from this study is the breadth of

ideas that the participants to the discussion paper perceived as associated with

audit quality. The concept of audit quality is dynamic and has to be seen in the

context of a range of interwoven regulations and guidance, the cooperation of

executive management, participation of the AC, individual auditors and the

effectiveness of the audit firm‘s procedures and policies, all of which promote high

audit quality. The results of this investigation suggest that audit quality is

influenced by various elements within and outside the audit firm. However, the

overall impact that these various elements have had on audit quality is subject to

further examination. Therefore, the study of the consultation around the FRC

discussion paper has made a considerable contribution in selecting issues to

emphasise in the interview. Details of the impact of various elements gathered from

the interviews are provided in the following three chapters.

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Chapter 5

Audit Partners’ Perceptions Concerning Audit Quality in Practice

5.0 Introduction

The purpose of this chapter is to set out the results of the interviews that were

conducted with audit partners to elicit their views concerning the meaning of audit

quality, factors that influence the construction of that meaning and the

representation of that meaning in practice. The background to and structure of the

interviews and the methodological approach to the analysis of the evidence

collected were described earlier in the thesis (see Sections 3.2 and 3.3.1.2

respectively); this chapter presents and comments on the views expressed.

This chapter is structured as follows. Section 5.1 addresses research question 1,

and describes multiple meanings audit partners associate with audit quality in

practice. Section 5.2 discusses factors that shape and influence the construction of

the meanings of audit quality, thus addressing research questions 2 and 4. Section

5.3 how the meanings of audit quality are represented in the operation of the audit

partners, which is the subject matter of research question 3. Section 5.4 presents

empirical evidence that highlights the existence of quality conflicts in practice.

Section 5.5 addresses research question 5 and discusses the impact of the AC on

the external audit function. Section 5.6 provides a summary discussion of the

findings and the conclusions of the chapter.

5.1 Meanings of Audit Quality in Practice

The thematic analysis of the responses demonstrates that the audit partners

predominantly frame their meanings of audit quality around three important

constructs. First, the notion of audit quality is associated with the concept of the

professionalism of the external auditors. Second, audit partners place great

emphasis on compliance with internal and external quality requirements in

operationalising the meaning of audit quality in practice. Finally, the concept of

audit quality is connected with the construct concerning the commercial values of

the audit firm. The discussion that follows will show that the three elements serve

to give structure to the meaning of audit quality in practice.

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5.1.1. Professionalism

A first aspect to the audit partners‘ understanding of the meaning of audit quality

relates to what may be called ‗professionalism‘. This meaning is connected to a

range of potential individual attributes and values that can have an impact on the

conduct of the audit, such as professional judgement, providing an independent

challenge to management, experience, knowledge, competence, professional

scepticism, independence and objectivity. Analysis suggests that audit partners‘

sense of meaning of audit quality is related to some extent, to the background that

they possess, which is consistent with their status and expected role as a member

of a professional occupation.

“Audit quality...I think it is a combination of knowledge and technical

competence, with an appropriate state of mind about bringing independent

and professional scepticism to what we do” (AP7).

“You have independence and integrity and those two things are more

important than anything else. So, if your clients were to ask you to do

something, you have to behave with integrity and independence even if it

costs you money basically. That is the difference between being a

professional and not. I have a much higher standard of ethics that is an old

fashioned view” (AP11).

When discussing the meaning of audit quality, audit partners expressed the view

that relates people to the element of audit quality. The quotations below illustrate

the importance of people and refer to the auditor‘s professional attributes to audit

quality. Frequently during the interviews, the audit partners argued that auditors‘

knowledge, experience and skills influence various audit tasks such as risk

assessment, planning decisions and evidence evaluation to arrive at an audit

judgement. Consistent with the dominant audit quality discourse (as discussed in

section 2.1.1.) and with the two other groups in the study (AC members and quality

inspectors), the quotes below assume that audit quality is achieved through the use

of auditors who have the ‗right‘ level of knowledge, competence and experience,

which shows that characteristics related to individual auditors are generally

perceived as an important determinant of audit quality. For example, when

discussing the meaning of audit quality, several audit partners mentioned that the

strength of the auditor‘s professional attributes, such as judgement and experience,

provided ‗comfort‘ as to the fulfilment of appropriate audit quality. Here, quality of

audit is articulated by way of how auditor‘s experience and knowledge play a part in

the identification and resolution of significant key risk areas that could affect the

audit opinion or judgement. The audit partners appear to believe that having the

ability to understand and identify the risks of a particular audit client, makes them

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better able to carry out work on a specific risks issue (for example, impairment of

assets) that reflects audit quality. The importance of risk as part of construction to

the meaning of audit quality is also shared by the AC members in the study.

Therefore, it appears that professional attributes may generate feelings of

confidence not only for the auditors but also the others about audit quality, which

possibly affects their performance during the conduct of the audit (e.g. being more

confident may translate into asking more challenging questions during the conduct

of the audit and being more critical during evidence evaluation).

“I think the firm‟s internal message about audit quality is actually people

quality... audit quality is very much about the people we have and the way

in which they understand what they are doing” (AP5).

“Audit quality is about doing the right thing at the right time, involving the

right people, having the right set of reviews, doing the right amount of work,

and resolution and application of judgement in matters arising” (AP3).

The audit partners viewed auditors‘ professional attributes as a manageable input

and seemed to argue that the more professional the auditors, the more likely that

the auditor will produce quality work. Consequently, the underlying notion of

professionalism is an important aspect of audit practice and are used by all audit

partners to provide structure and meaning to the quality of work that they perform.

Such rationales provide support for the claims of auditors to knowledge bases that

portray auditors as an expert group and equate quality with auditors‘ professional

characteristics.

5.1.2 Compliance Obligations

Again, consistent with the dominant audit quality discourse (as discussed in section

2.2), it was apparent during the interviews that all of the audit partners strongly

associate the meaning of audit quality with satisfying the requirements of the

standards and guidelines during the course of the audit. The quality inspectors in

the study also view compliance with standards and guidelines as important to audit

quality. For example, in the first quote below, the audit partner emphasised that

high audit quality is linked, to some extent, to his/her meeting the requirements of

standards and guidelines. The next quote provides a picture of how the auditing

standards were operationalised to give meaning about audit quality in the day-to-

day audit practices, where standards are regarded as a ‗rulebook‘ that govern the

conduct of auditors. Further he/she suggested that compliance obligations with the

standards and guidelines play a key role in providing assurance about audit quality,

not only in the eyes of the audit partners but also to outside people.

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“...I think, in a sense, quality audit is expected to be high quality from a

compliance perspective...” (AP3).

“I do not mean going over and above the standards, we have a rulebook as

such, which is the suite of auditing standards and we have to comply with

that in every audit that we do. So, to my mind, producing the quality audit

is to make sure that we comply with those standards and that the outside

world has confidence in what the audit product is” (AP4).

Some of the audit partners viewed performing the audit beyond the requirements

of the standards as important to demonstrate that they have performed a high

quality audit, that is, at a level that exceeds the minimum acceptable level of

quality. They suggested that the development of regulatory inspection (the AIU)

has had an impact in recent years and has caused increasing emphasis on

performing the audit in a manner that goes beyond the standards. In contrast,

some partners expressed the view that because the auditing standards are set at a

high level, compliance with the standards would actually be sufficient to indicate

that they have performed a high quality audit. These conflicting views about the

current level of the auditing standards and the extent to which they reflect an

appropriate expression of audit quality are illustrated by the following quotations:

“(If) we do not get good quality audit works we will get a negative finding

from the regulators report. The AIU reports are now publicly available. There

is an increased need to make sure that what we do is demonstrably beyond

the minimum standards” (AP2).

“Well, the auditing standards themselves, I think it is wrong to say well this

is like a minimum standard because I would say they are quite a high

standard anyway...” (AP4).

The regime of inspection also marks another aspect of these compliance obligations

of audit quality as expressed by the audit partners, which refers to the importance

of producing sufficient audit documentation to satisfy the assessment of quality

carried out by the AIU. It was evident that documentation standards were one of

the main focuses of the auditors as a means of ensuring high ‗compliance‘ quality.

The following comment summarises the views of auditors on this issue:

“...the audit process or the audit documentation process. I think that is

influenced by regulatory factors because from a regulatory perspective, for

example, the AIU have a general rule, which is commonly known, „if it is not

documented it does not exist‟. Therefore, I think there is an appropriate

focus within our firm to ensure that there is appropriate audit

documentation... I think the audit documentation is part of the audit quality

equation. It is not the full equation” (AP7).

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The above quotations suggest that the auditing standards and the activities of

regulators are seen as relevant in determining what constitutes high audit quality,

by influencing the extent of audit work and the required level of quality. Here, the

regime of inspection has established another discourse around the notion of audit

quality in practice among the audit practitioners. Compliance quality is give

meaning by doing enough to satisfy the quality assessment carried out by the AIU.

Nonetheless, only a small number of audits will actually be inspected by the AIU

and, therefore, the partners‘ approach might represent a reaction to the threat of

inspection rather than the actuality, as expressed by the following audit partner:

“I would say the minimum standard has increased over the last ten years

because anybody who wants a licence to audit has to adhere or meet certain

minimum standards to keep it...Quality is the overarching requirement. Yes,

it is in part a response to the regulator. To demonstrate to the regulator how

we embedded quality in everything that we do, however, overtime it impacts

on the way people behave day to day and they do strive for better quality.

Increasingly, these days, if you do not execute it well you might lose your

job. Really, that is the most brutal driver of all” (AP2).

Some respondents did discuss another way in which they perceived compliance with

the standards and external inspection as useful, namely as a legitimating tool to

gain wider public acceptance that audits are conducted with suitable quality. This is

important to gain wider acceptance from society at large (audit clients,

shareholders and other stakeholders) about the quality of audit services offered by

public accounting firms. The benefit derived from external regulation provides the

comfort that the public need concerning audit quality.

“So, to my mind, producing the quality audit is to make sure that we comply

with those standards and that the outside world has confidence in what the

audit product is” (AP4).

“It gives me some comfort and I think it should give investors more comfort

that there is a regulator there, that there is a regulatory body looking at and

challenging the auditors and their approach to the audit ...” (AP9).

As noted above, the construction of audit quality can also be explained as reflecting

the issue of the auditors‘ need to gain social acceptability and credibility. The

auditor‘s work arrangements and procedures are structured and conditioned by

their institutional arrangements. It is important for them to be seen as adhering to

such arrangements in order to gain legitimacy. Consequently, it can be argued that

compliance obligations are an important legitimating vehicle for the individual audit

partner, audit firms and the audit profession as a whole. To some extent, it

demonstrates the auditors‘ desire to maintain wide societal acceptance of their role,

to enhance survival and the stability of the profession. This is perhaps important to

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the audit firms because audit quality is difficult for people external to the process to

observe directly.

Another new set of discourse and ideals around audit quality relates to the audit

firms‘ monitoring and micro-quality control. The meaning of audit quality is

connected to meeting requirements of internal quality review and other quality

control procedures within the audit firm. As implied in the first quote, the audit

partner stated that compliance with the internal quality standards would ensure a

sufficient level of audit quality by way of ensuring sufficient challenge to the

management and appropriate audit judgement, as illustrated by the audit partner

concerning the application of a monitoring tool - professional standards review

within his/her firm. The following quote provides insight into how monitoring and

micro-quality control are used to justify how ‗right‘ or ‗appropriate‘ audit quality is

achieved during the conduct of the audit.

“Part of the concept of quality is addressed by something that we call

professional standard review, which is a hot independent review of any

opinion that the firm is issuing in relation to auditing, accounting and

financial reporting matters. We also have various compliance functions,

which are manifested in something called an audit quality partner

dashboard, whereby there are various quality and compliance procedures

that partners have to comply with...I would say the concept and the

approach are an independent challenge/review of the judgment and

documentation of the engagement teams and compliance with external and

internal standards” (AP1).

In general, it is evident that compliance obligations are important as a key aspect

to gain acceptance or legitimacy about what the audit firm and auditor are doing to

promote and achieve audit quality in practice.

5.1.3 Commercial Values

The partners‘ views also revealed the importance of commercial values to the

meaning of audit quality in practice. Analysis indicates that commercial

considerations influence the idea of audit quality in the minds of the audit partners,

as the concepts of service quality was very prominent in most interviews. During

the interviews, the attribute of audit quality involved frequent references to the

added value or additional benefits that audit clients expected from auditors. This

attribute was widely considered as an integral feature of audit quality, in which

most of the audit partners make sense of the concept by relating it to improving a

client‘s business operation and financial performance. The importance of this aspect

of ‗service quality‘ is also shared by the AC members in the study.

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“We are a client service practice so we have to provide our clients with a

service in a way that the client expects the service to be delivered” (AP5).

“The other part of audit quality is where clients get the benefit of the

auditor‟s input in terms of improvements to the business, improvements in

efficiency and more effective controls...” (AP9).

Quality, as value for money, reflects the auditor‘s concern about providing quality

audit services to the audit client at a reasonable cost. In the interviews, most of the

audit partners drew attention to the intense competition in the audit market, which

exerts pressure on them to offer a better service by providing better outcomes or

return to the audit client at a given cost. This is also important for them to retain

their audit clients, as suggested by Beattie and Fernley (1995); value for money is

an important consideration for companies in selecting external auditors. As such,

this notion of audit quality is important because providing quality through value for

money is important in meeting client‘s expectations. This leads to a satisfied client

that can lead to client retention and profitability.

“...certainly in the current economic environment it is really important for us

to retain our existing client base and the easiest way of doing that is doing a

good job and making sure that the client is really happy with the

service...we are not seeing as many of our clients coming out for re-

proposal... the economic downturn comes and clients start thinking whether

they are getting good value for money from this...if they are not getting

good value that is when they maybe decide to test the market. I mean that

is a whole other area of quality in terms of what the client is seeing as a

quality audit” (AP3).

The audit partners also suggested that audit quality is reflected in the way they

maintain quality relationships with the audit client. This attribute of quality is

important for them, because, as a client service firm, maintaining a ‗good‘

relationship with the management and keeping them happy is crucial. As suggested

by Behn et al. (1997), the quality of the relationship is a key determinant in

satisfying the client.

“Audit quality is all about the people we have...the way in which they

interact with the client. I think that is the key message and what we would

say is the people that drive quality and how they react to the client‟s

situation” (AP5).

“I think, in a way, it is very difficult for our clients to assess the quality of

the work that we are doing, I think they form a perception and an

impression based upon their relationship with us, the interaction they have

with us” (AP3).

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Commercial values also relate to the way in which notions of efficiency and

effectiveness are reflected in the audit partners‘ comments and how they appear to

give meaning to the concept of audit quality in practice. The notions of efficiency

and effectiveness are highly related to commercial considerations over pressure for

cost reduction and profit maximization. The following quote illustrates how

efficiency and effectiveness are used to justify that ‗sufficient‘ audit quality is

achieved in practice. In that sense efficiency and effectiveness focus on the content

of the actual evidential processes and procedures that comprise the audit, as

discussed by the following audit partner:

“Fees are a feature of the market so, at times, there is a lot of pressure on

fees. You then work out what the job is going to cost and that should drive

the budget...you can challenge the audit effectiveness by getting proper

involvement of the partners at the planning stage. For example, ensuring

that they use their experience of the job...to focus the work on the right

areas, on the risk areas, make sure you do not do too much work in the

wrong areas, waste time, you can make sure it is efficient in terms of the

longer a process is drawn out the more leakage points there are in it in

terms of downtime and inefficiency so you can plan the audit in conjunction

with the client...there is a huge issue around project management and an

efficient close down of the job at the end to make sure that it is closed down

in an efficient way” (AP10).

The importance of creating value to auditing in the perceptions and expectations of

the audit client was evident in the interviews. The audit partners‘ views suggested

that quality in practice was always being looked at from the perspective of their

client. As argued by Jeppesen (1998), the management is perceived as the client

by the auditors. Some of audit partners even described success in re-tendering for

an appointment or the length of tenure in retaining the audit client, which reflect

management satisfaction with the audit, as offering one important piece of

evidence of audit quality, as illustrated by the following quote:

“It is only fair to say that from the firm‟s point of view, the centre or the key

focus for us in terms of what is great, is the clients... the client is at the core

of it and when we look at audit quality from the client‟s point of view, you

have a number of outputs, which will be how long you can keep the client

for and your success on re-tendering and these sort of things...” (AP6).

“So again, you might say that the heart of the audit quality is that the

auditors should never be in a position where the people that they potentially

criticise can sack them, which is what you have. I am not saying that inhibits

people‟s behaviour but it can influence people‟s behaviour” (AP2).

The majority of the audit partners believed that audit quality is not only about

meeting the various requirements of the standards and guidelines (compliance

obligations) but also about meeting the expectations of the audit client (the

management). In the following quotes, it is evident that audit partners want to be

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regarded as more than a company‘s auditor and wish to provide valuable audit

service that can be beneficial to the audit client. In this light, the client expects the

auditor to be a business partner rather than a ‗police officer‘. The second quote

illustrates that the audit partner believed that audit quality is something that

cannot be measured and he/she thought that what is considered to be quality is

closely related to the ‗value‘ that the audit services can offer to a particular audit

client.

“what does audit quality mean to me? Well, on the one side, it means

compliance with the strict accounting standards and auditing standards, and

on the other, it means in terms of the client‟s perception what is the quality

of the audit, has it been a beneficial experience for them and that it is more

than just compliance with the standards...we are trying to do more than just

a purely compliant audit because, ultimately, I do not think you are ever

going to exceed your clients‟ expectations if all you are doing is ticking the

boxes in respect of compliance; audit quality is very important to us as a

practice... hopefully we can get to the stage of being a trusted business

advisor, which is a bit more than just being the auditor” (AP3).

“An audit is not something you can necessarily say this is high, medium or

low quality, it is not a service in that sense, it is either valued or it is not

valued...So, in that sense, it is actually easier for the client to recognise

what you do for them...you hope they will continue to use you because it is

a valued experience” (AP11).

In general, from the analysis of the interview evidence it can be deduced that audit

partners perceived audit quality as having multiple meanings. Interestingly the

interviews suggest that commercial interests, that is, profit maximizing and

reducing cost, play a role in giving meaning to audit quality in the eyes of the audit

partners. Consequently, providing value added services and meeting the

expectations of audit clients become important constructs for the meaning of audit

quality perceived by the audit partners.

The above analysis shows different elements and attributes of the concept of audit

quality held for the audit partners interviewed, specifically professionalism,

compliance and commercial values, and illustrated how these elements featured in

the partners‘ comments. The discussion below relates those elements to the

broader regulatory, societal and economic factors that influence the construction of

practical meaning for the concept of quality. The concepts of role expectations and

self-image are also considered in the assessment of the interaction process that

shapes and influences the construction of meanings of audit quality.

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5.2 Factors Influencing the Construction of Meanings of

Audit Quality

Intrinsic to a discussion of the meanings that audit practitioners ascribe to the

concept of audit quality is a consideration of how the meaning is made. This section

attempts to answer the second research question, that is, to look at factors that

influence the process of construction of the meaning for audit quality. In particular,

it explores the influence of broader societal, regulatory and economic forces and

the concepts of role expectations and self-image on the meanings of audit quality.

In so doing, the discussion below directs specific attention towards understanding

the competitive, commercial and professional factors that underlie what audit

quality means for day-to-day audit practice. This section also discusses the

potential impact of the AIU on audit quality, thus addressing research question 4.

In the interviews, three key elements of audit quality were identified that give

meaning to audit quality – professionalism, compliance obligations and commercial

values, which are closely related to two underlying facets of auditing. First,

professionalism and compliance obligations are two elements that stem from the

concept of auditing as a profession. These elements of audit quality emerge when

the audit partners perceive that their role should adhere to the standards of the

professional or expert group of which they are members (Burns and Haga, 1977;

Miner et al., 1994). From this perspective, to understand audit quality one needs

first to understand that auditing is a professional service that concerns the

possession of knowledge or expertise and the display of appropriate behaviour

(Grey, 1998). As a result, how auditors perceive their roles will be likely to have an

effect on what they consider as legitimate and useful knowledge and, consequently,

on their actions (Cooper and Robson, 2006). This perspective also requires

recognition that auditing is an activity that involves the negotiation of a legitimate

and institutionally acceptable knowledge base and practice (reflected in, for

example, codified rules and regulations, education, training, audit methodology and

quality control procedures), which influence the institutional significance of auditing

and auditors (Power, 1996). From this perspective, audit quality primarily relates to

professional attributes, values and appearance that individual auditors have such as

judgement, expertise, competence, knowledge, interpersonal skills, ethics and

independence, which it can be argued can influence their performance in executing

audit responsibilities. In addition, audit quality is also about meeting the

requirements of the standards and guidelines in the conduct of the audit. From

another angle, compliance obligations also have some commercial aspect of it

where if auditors fail to comply with those standards and guidelines it can expose

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them to the threat of litigation, which could possibly, involve high cost and damage

to their economic reputation (Palmrose, 1988).

Second, commercial values stem from the concept of auditing as an industry,

where, at the same time, auditors are also members of commercial professional

service firms that are motivated by profit and capital accumulation, which is likely

to determine their practices and actions (Cooper and Robson, 2006). This element

of audit quality appears where the auditors perceive that their role is to fulfil the

client‘s (the management) expectations and the audit firm‘s business objectives.

From this perspective, to understand audit quality one needs first to understand

that auditing is a commercial professional service that emphasises profit

maximisation and cost reduction for supporting the business of auditing.

Accordingly, representation of audit knowledge and practice should be consistent

with economic pressure and client legitimacy. From this perspective, audit quality is

primarily about client service, particularly providing value added service and

satisfying the client‘s needs and expectations.

The discussion which follows will show that the two concepts (audit as a profession

and audit as an industry) serve to give structure and justification to the meaning of

audit quality in practice. In other words, the concepts influence the construction

and presentation of the meaning of audit quality.

Analysis of the interviews suggests that social factors influence the meaning of

audit quality in practice through the concept of ‗professionalism‘ of the auditors. In

this context, professional self-image influences the way in which meanings are

constructed and the circumstances in which the idea of audit quality is interpreted

and given practical meaning. In the interviews, the audit partners affirmed these

notions of professionalism and linked them to audit quality, most notably to

professional judgement and expertise or knowledge. The impact of auditors‘ self-

image is also connected to values and behaviours that are regarded as an

important part of auditors‘ culture. As such, attributes, such as behaving in a

professional manner, independence and integrity are significant in giving meaning

for audit quality in practice.

“The essence of a profession is that people behave in a professional manner,

which is not something you can ensure by only writing things down or by

having other people review what you do. If you do not have it inside then it

is not going to be there. So we train people and recruit people to actually be

proper professionals, therefore, to have an ethos and a culture of

professionalism and independence as well as having procedures to do that.

However, I suppose that the first essential is that it should be from the

inside out” (AP11).

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During the interviews, the audit partners tended to express pride regarding their

professional status, while simultaneously expressing feelings that the recent

changes in the audit regulatory framework did not appear to regard them as such.

To some extent, the audit partners‘ comments suggested that more independent

regulation of the audit profession invalidates their professional identity or questions

their professional standing. Regulatory intervention might reduce their professional

privileges and status in society. Considered from this perspective, it is not really

surprising that the symbolism of professional values is strongly embedded among

auditors. Not only did it confirm the auditors‘ sense of themselves as professionals,

but it was also seen as maintaining their professional identity:

“...I think audit quality is taken very seriously because it is the lifeblood of

most firms and I think the profession is professional and is often

misunderstood” (AP10).

“So the fact that the AIU can come in, and I do feel very strongly about this,

the fact that the AIU comes in and spends as much time reviewing a job as

we spent doing it is just ridiculous and they can come up with just hundreds

of questions as to “why did you do this, how did you do that, why did you

not do this” it is just ridiculous...” (AP3).

From the institutional perspective, the auditing profession established its role and

responsibility for the public interest in order to gain legitimacy. As contended by

Hall (1968), a belief in social obligation requires an individual to recognize the

importance of their work to society, and the fact that their work benefits not only

the organisation and individual, but the public as well. The profession also creates

professionalism as an ‗image‘ in order to attain social acceptability and credibility.

Public interest becomes the ‗ideology‘ in providing a socially integrative function

and ensures wider societal acceptance of the profession, as explained by one of the

audit partners:

“I think, ultimately, that audit quality means that the recipient of an audit

opinion can place reliance on the fact that the opinion is right and, hence,

that helps the stability of capital markets and helps people to make informed

decisions on the basis of the accounts on which the opinion is given. So that

is probably why we have audit opinions, therefore, why audit quality is

important” (AP10).

The construction of quality through compliance obligations can be partly explained

as having occurred through the influence of regulatory forces. As other authors

have noted, in the context of the auditing profession regulatory pressures could

affect the behaviour and structure of the audit firm (Dirsmith et al., 1997;

Covaleski et al., 2003; Humphrey et al., 2009). This is because audit firms, as

suppliers of the audit services, operate in an environment where connections to

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professional associations and regulatory bodies are important for their reputation

and legitimacy and have the potential to exert a significant influence on the design

of their audit work, procedures, processes and practices. The interviews provide

evidence that the interaction between the auditors and the regulator, in particular

the AIU, influences the behaviour of the auditors and changes that are made in

audit practice to reflect the expectations of the regulator. Similar to Nagy and

Cenker (2007), recent changes in regulatory framework introduce pressure that

influences audit firm procedures and practices.

“What you see through the AIU is more emphasis on file review, it is

documentation quality certainly. Fundamentally, people are much more

thoughtful now when somebody looks up the file. Most people have their file

review by the external regulator now. It is around documentation, making

sure it is documented and has appropriate support on files. So, I would say

the biggest area where the regulator has changed things recently” (AP2).

In respect of the impact of the AIU on the process of the conduct of audit, the

evidence shows that the regime of inspection has had a significant impact on the

process of documentation of audit work. Specifically, it has influenced the audit

firms‘ monitoring and control procedures in relation to file review and the use of

formalised electronic support systems that enhance audit quality through

compliance with the auditing and documentation standards. Most of the partners

indicated a rigorous process of review on closing down the audit files, which

reflected a greater focus on the quality of documentation to satisfy the expectations

of the regulator. Some of them mentioned the use of computerised audit systems

to ensure compliance with the documentation requirements within the firm.

Consequently, a number of the audit partners revealed how meeting the

expectations of the regulator has created an additional challenge to them, which

highlights the struggle of the practitioners to attain a balance between spending

time on documentation rather than the audit itself. Further, the majority of the

audit partners were apprehensive about the impact of the AIU on cost and the

benefits associated with the inspection. They suggested that they need to spend

considerable time and provide the necessary staff to meet the requirements of the

AIU, which affects the cost of the audit. The situation has created additional

pressure on audit firms because increases in audit fees do not always correspond

with the audit costs. The following quotation illustrates the views concerning this

issue:

“You start in the area concerning audit fees for the audit work and the

associated costs. The balance between spending enough time on something

to make sure it is documented, every last detail...The client is prepared to

pay a fee, which will not necessarily cover all the time costs associated with

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it. In the market, at the moment, we can see very aggressive pricing for

some firms to win work...clients would have a fixed idea of what they would

prepare to pay for that. They will try to get it as cheap as possible. It is true

that in many cases you will not get a different audit opinion if you document

it any less or you document every single conversation with the auditors

down to any degree. You might be able to give them a better fee” (AP7).

Frequently, during the interviews, the audit partners expressed deep concern that

the current efforts undertaken by the AIU are moving away from principles to a rule

based audit approach that might emphasise tick box compliance at the expense of

their professional judgement. Findings from interviews with auditors in the US by

Nagy and Cenker (2007) support the claim that the changes in audit regulation

influence the nature of audit that become more procedural to reflect regulatory

compliance. This expression of discomfort by the audit partners may be also

construed as the effect that regulation has in diminishing professional judgement of

auditors or the ‗de-professionalization‘ of the audit profession that is related to the

value of an audit. As mentioned by the following audit partners:

“It does overly encourage teams to focus upon the process and

documentation at the expense of appropriate judgment. I think it is just a

kind of side effect of the influence of the regulators and sometimes there is

a perception with the audit teams that we have to do this because of the

regulator. However, it should not be just a process and should not remove

the fundamental need to apply audit judgment, because, if it does, you

come back to your first question in terms of what counts in terms of an

audit. The auditors will not be providing the appropriate challenge to clients

and providing appropriate reporting if it is just a tick box process” (AP1).

“There is greater and greater emphasis on what is written down rather than

what is actually done and the judgments that are formed” (AP11).

Several views on the role of the AIU were expressed by the interviewees. In

general, most of the audit partners tended to voice feelings of unease when

discussing the inspection process. The AIU‘s approach was perceived to be

burdensome and highlighted overwhelming workloads resulting from such

inspections. Some of the audit partners felt that a lack of beneficial feedback was

given in the review. The audit partners also commented on the unpleasant

experience of working with the AIU. The audit partners also believed that the

regime of inspection does not have a significant impact on the attributes of

commercial values in relation to their audit client. The following quotations illustrate

the partners‘ views on the above issues

“It is a pretty onerous experience and it is a pretty unpleasant experience to

be reviewed by the AIU and I am not sure that is actually how it should be. I

fully acknowledge they have got a job to do and I do not think anybody

would want them to not be on the side of high quality audits, however,

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equally I think they ought to be coming in from the perspective that you are

innocent until proven guilty rather than “actually this is a bad audit and now

you have got to prove that it‟s a good audit”, which, personally, I think is

the wrong way to come at it” (AP3).

“Regulators... whether it has actually improved the quality of audits, I am

not sure that it has. I think we do good quality audits anyway, if we do not

we get sued... I do not think it will necessarily improve the quality or indeed

that it will help the clients get a better service...” (AP11).

Another significant concern of the audit partners in relation to the regime of

inspection is the impact of public reporting, that is the AIU public reports on the

perception of the users‘ concerning the audit quality. In particular, they were

concerned that the public would misinterpret the information published in the

report, which might affect public confidence and trust concerning the quality of the

services that they offer. This might also affect the business of the audit firm.

“My concern is that the man on the Clapham Omnibus may see some issues

as being more severe than they really are in practice if they are

misunderstood in a report...I do think that if people misunderstand things it

might just be some documentation around something, quite a small matter

could be perceived by an external reader thinking “oh my gosh, you know x,

y or z firm does not know how to do this” so if it is not well written or the

issue is not clearly understood it could be very detrimental to the firm‟s

market position” (AP9).

Despite concerns about the negative impact of the inspection, some of the

interviewees accepted the important role of public reporting to enhance confidence

and provide additional comfort to the users of the audit report about the level of

audit quality offered by the audit firms. A small number of respondents viewed the

inspection as having a positive impact on the audit profession by promoting greater

transparency concerning the conduct and control of audit quality in practice. The

views expressed about these issues are illustrated by the following quotations:

“Obviously we have external regulators who come in and assess audit

quality, and obviously that is one of the changes that I have seen over the

last ten years. They come in and make an assessment of quality. If that is

what is needed to give the external world further comfort about the

adequacy of the quality, then I suppose that is where one has to be” (AP8).

“I think it is forcing discipline amongst the players, which must be a good

thing, so it is forcing everyone to demonstrate how to do things, so the

control processes are there in place. So my personal view is that it is

improved audit quality and processes across the board, I think what is

undeniable is that it is giving more assurance to the public that someone is

looking at audit quality and someone is making sure it is happening” (AP6).

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The use of a construct of commercial values to give meaning to the concept of audit

quality can be understood by looking at the nature of the market of auditing

services. The audit market is subject to active competition and pressure on the fees

for audit services (Humphrey, Moizer and Turley, 2007). As a result, there has been

increasing need for audit firms to retain their client base through both creating and

promoting perceptions of the value of the audit. This effort can also reflect the

firms‘ objective to enhance profitability. In the interviews, commercial values were

represented by comments referring to quality attributes such as value for money in

the delivery of the audit, attempts to promote a view amongst clients that the audit

represents a value added service and the importance of meeting the expectations

of customers (i.e. client company management). Commercial values are part of the

culture within a firm in which audit partners emphasise delivering services that are

valued and expected by their clients. This establishes the fundamental importance

of serving the client by the audit firm. During the interviews the majority of the

audit partners made comments referring to the importance of these attributes and

connected them to the overall objective of audit quality, as illustrated by the

following quotations:

“I think what works for us in the long term is clearly a culture that

encourages our people to be really engaged with clients...delivering and

bringing value to the clients. I mean, ultimately, we are a service industry”

(AP3).

“... there are four strong players, it is going to be competitive, it will be

competitive. We know that if we do something wrong for one of our clients,

if we do not deliver the quality that the client expects or the service the

client expects then we are not going to be there for very long, so it is a very

competitive market” (AP7).

The importance of commercial values also fundamentally relates to the economic

nature of the auditing services and the manner in which audit appointments are

made and contracts negotiated. The audit involves an independent examination of a

set of financial statements prepared by the company management. In economic

terms, the audit service relates to the monitoring costs borne by shareholders to

ensure that the management acts in their best interest. In this economic

arrangement, the auditors are accountable to the shareholder, however, in practice

they are paid and appointed or selected by the company management. This

arrangement signifies the interdependence of economic interests between the

auditor and the management (Simunic, 1980). The arrangement has also

substantiated the imbalance of power between the auditor and the management,

for the reason that the power to hire or fire the auditors as well as the

determination of audit fees and scope reside with the management. The

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asymmetrical power can create a conflict in the auditor and client relationship when

the dependence of the auditor on the client is much greater than the dependence of

the client on the auditor (Nichols and Price, 1976). Some audit partners‘ comments

explicitly refer to how the commercial and contracting arrangements for audit

appointments influence the meaning of audit quality in practice:

“The heart of the matter is that we are been paid by somebody to give an

opinion on their accounts. There is an element of interdependence. Although

you could say it will always be there regardless of the regulation being in

place, it is always the commercial pressure that you are under...I am not

saying that inhibits people‟s behaviour but it can influence people‟s

behaviour” (AP2).

“The auditors‟ fees are theoretically set by the shareholders, however, in

practice they are set by the directors and one of the auditor‟s prime

responsibilities is to check what the directors have been doing, so, by

definition, there is in built tension” (AP11).

The idea that differential audit quality is not observable to those on whose behalf

the audit is conducted, nor to those monitoring the delivery of the audit, and that

differential quality can be signalled to management, reinforces the notion of the

importance of satisfying client expectations to achieve appropriate audit quality. To

understand audit quality from this perspective, it is of course relevant to note the

nature of audit firms as commercial enterprises operating in a competitive market.

Commercial pressure and the interdependence between the auditor and the client

management may shape the meaning of audit quality and how it is made

operational in practice. One critical issue here is whether task interdependence and

commercial pressure create a conflict of interest that might result in the

independence of the auditor and the technical quality of the audit being undermined

and the auditors not acting in the best interests of the owners to whom they report.

“I think it is very difficult for our clients to in a way assess the quality of the

work that we are doing. I think they form a perception and an impression

based upon their relationship to us, the interaction they have with us. I think

as a big four firm and the biggest professional firm they would expect our

quality to be absolutely tip top and that is just a general expectation and it

gets back to the point that that is a fundamental attribute that we are expected to fulfil is a top quality audit” (AP3).

The construction audit quality –efficient and effective audit, that is, quality in the

design and conduct of the audit procedures and processes reflects considerable

regulatory and economic pressures facing the audit firms. Hatherly (1999) suggests

that regulatory and fee pressures could influence the audit firm‘s efforts to be more

efficient and effective. The economic climate may impose significant pressure on

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the firms to ensure profit and survival and, consequently, minimizing cost is

deemed important.

“I think what we are particularly focusing on at the moment is that it is

really important that we get the audit planning right and that really means,

among other things, that this is an area where there needs to be significant

input from senior members of the audit team including the audit partners

who have the judgment and experience...They are going to tell you before

they start the audit what the issues are. Now, that is not to suggest you

should not be doing the detailed audit testing, but it is to recognise where

the productive areas of an audit are” (AP1).

The above analysis shows that the construction of the meanings of the audit quality

in practice is influenced by interactions – role expectations, self images, regulatory,

social and economic factors in the auditing environment faced by the auditors. The

audit environment is constituted by an array of factors and actors that interact with

one another, which can be said to influence and shape the perceptions of audit

quality.

5.3 Representations of Audit Quality in Practice

This section answers the third research question: to document the different

representations or symbols associated with the meanings of audit quality in

practice. A first dimension to the interviewees understanding of the meaning of

audit quality connected to what may be called ‗professionalism‘ that associated with

a range potential individual attributes that can have an impact on the conduct of

the audit, such as professional judgement, skills, experience, knowledge,

competence and expertise Analysis of the evidence from the interviews

demonstrates that various symbols are brought into play to represent and

communicate that meaning in practice. All of the audit partners believe that audit

quality is largely determined by the quality of the people. The audit firm creates

explicit mechanisms to operationalise this meaning through entry prerequisites,

professional examinations, institutionalized programmes of academic education,

work related training and experience. Auditors use these strategies to establish that

credible intellectual knowledge – ‗professional expertise‘ – underlies their practices,

which gives some indication or signal concerning the quality of work performed by

its members, which, in itself, is difficult to observe not only by the outside people

but also for the audit practitioners themselves.

Consequently, certain representations were emphasised by the audit partners to

signify the meaning of audit quality. For instance, people quality is represented

through the rigorous recruitment process of the audit firm and the academic

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qualifications of the individual auditor. They emphasised that these are critical to

ensure they have the ‗right‘ people of the appropriate calibre doing the audit.

Furthermore, the skills, competence and knowledge of the auditors are associated

with the training they attend that keep them up to date with various aspects of

accounting, auditing and business issues, which is important to reflect the level of

competence and expertise that they have, as illustrated by AP3 in quotations one.

In the last quote, the audit partner elaborates on how job training on various

industries could enhance the professional experience of individual auditors, which

might possibly affect their performance during the conduct of the audit by asking

more challenging questions or posing a sufficient challenge to the audit client (the

management). This quote and several others also imply the beneficial impacts of

training concerning the ability of the auditor in assessing and resolving significant

audit issues during the conduct of the audit that could affect the auditor‘s opinion

or judgement.

“We invest hugely in our people over the first three years in terms of getting

their skill and competence raised to a reasonable level, lots of training,

either classroom based training or on the job training, lots of coaching and,

ultimately, we have a feedback and appraisal mechanism to ensure that the

quality of the work that people are doing is of the right standard and that

people are rewarded and appraised on that basis” (AP3).

“We try to give our people at the beginning of their career as broad an

experience aspossible...they can be working one day in insurance and one

day in the media sector, one day in the manufacturing sector and I think it

exercises their brain, helps them challenge how people do things. Because if

you always work in the same sector, you tend to be used to how people just

do things in that sector, but if you have had experience of other sectors, you

can bring a fresh perspective to things and ask different questions, more

challenging questions” (AP6).

The analysis shows that audit partners represent audit quality by emphasising the

need for coaching and the involvement of audit partners or seniors during various

stages of the audit to achieve high audit quality. In particular, the audit partners

emphasised the importance of their involvement in the audit planning by way of

ensuring that audit efforts are concentrated on the right areas, as illustrated by the

following quotes.

“...it is just getting the right coaching, the right seniority of people involved

at the right time of the audit. It is right up front in the planning stage of an

audit, really getting the input from the people that have been there

before...if you get the quality right, then you ask all the right questions at

the right time, you plan it properly, you have had someone on site making

sure it is working correctly” (AP5).

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The majority of the audit partners identify consultation as being central for audit

quality and this representation of quality appears to be believed in and shared by

all the audit partners interviewed. The quote indicates that consultation is practised

across the hierarchy of the audit while suggest that failure to consult with the

technical department on high-risk audit engagements could lead to unfavourable

consequences for the auditor. It is evident that considerable formal and informal

consultation has been practiced throughout the audit firm and that it is one of the

important features in the process of the conduct of the audit. This aspect of the

process of the conduct of the audit is highly associated with the symbol of the

quality of audit judgement.

“We encourage people to consult each other as much as possible, sometimes

these are like information consultations. If you have got decisions and you

are looking at something and you think „oh, I am not sure about this‟ you

will go next door and speak to one of the other partners, maybe informally

and just say „what do you think about this?‟ Then you have very informal

consultations, however, then, if you think you have got an assignment

where you are going to have a lot of issues, you would ask to have a second

partner quality control reviewer to look at your judgements. Obviously, that

is in any high-risk jobs. We also have a technical department that people

can go to and ask if they are not sure, so consultation is actively encouraged

where other people feel the need. When we come along and do the cold

reviews, if we look at something and we think „you did not treat this right‟ or

„you should have consulted somebody else‟ then they will get criticised for

not following due process. It is actually written down in our policies and procedures” (AP4).

Analysis of the evidence from the interviews demonstrates the important role of

internal quality reviews to operate and communicate compliance quality to various

internal and external compliance obligations. For example, the review process is

represented in practice to define compliance quality with the internal quality

standards by way of ensuring that auditors follow firm-wide policies and

procedures. The reviews are also symbolised to various attributes of

professionalism and commercial values. For instance, it symbolises audit quality by

way of ensuring a consistent audit approach or methodology across clients and

increasing audit efficiency and effectiveness. The reviews also symbolise decision

quality by having a quality review partner to assess the quality of audit

judgements. In general, the internal quality review is one of the important symbols

in constructing and attaining comfort that the audit partners achieve adequate audit

quality.

“How do we ensure that we deliver good quality audits? We have a

widespread internal programme of training for the staff and the partners.

We have an internal audit licensing system where partners demonstrate that

they have done sufficient training every year to keep that licence and they

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are regularly reviewed by our own internal quality control and review

programmes. If their work is not up to standard then they effectively get a

conditional licence and if they continue to not be up to standard they cannot

take audits” (AP11).

Answers were sought about the format and assessment of quality during the

review. The audit partners mentioned that the format of the review consists of a

detailed list of yes and no questions that cover areas such as compliance with the

auditing standards and documentation standards. The audit partners generally

insisted that the internal engagement quality review is extensive in terms of its

focus. The review process also covers the scope of the audit process, including the

appropriateness of the audit approach, which is linked to risk assessment,

sufficiency of the audit work, and identification and resolution of various key

auditing or accounting issues. In addition, the assessment also involves reviewing

other important areas such as reporting and communication with the audit client

and other relevant parties such as the audit committee.

“What our internal inspection does is much wider...things like quality

deliverable, have we properly met the audit committees report” (AP2).

The following quotation illustrates the process of the internal quality review that

supports the comfort of the audit partner concerning the level of audit quality. First,

a quality review partner would be required for high-risk audit engagements. Then, a

report will be prepared based on the review. The findings of the review will be fed

back to the engagement team, where, if issues emerge, they are required to be

resolved by the engagement team. Finally, the quality review partner will formally

sign off the file for clearance before the engagement partner signs off on the audit

report.

“Independent reviews by another senior manager, basically against a check

list, to make sure that the team has done their job properly and that it is

ready for me to sign off. So reviewers record their findings from that review

on a form that goes back to the engagement team, the engagement team

respond to that document and that gets formally signed off as being

satisfactorily cleared by the quality review partner” (AP3).

The views collected from interviewees about the role of audit methodology tend to

emphasise the importance of a risk-based audit approach to represent quality

audits. The auditors pointed out the impact of a risk-based audit approach on audit

quality in several ways. First, it assists in ensuring that sufficient audit work has

been performed in the areas where there is a higher risk of misstatement. Second,

the approach helps in facilitating an efficient audit by concentrating on the risk

areas. The risk-based audit methodology is perceived as being important in

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achieving an effective and efficient audit. The symbolic representation of efficiency

and effectiveness links quality with the audit firm‘s methodology, in that sense, the

notion of audit quality focuses on the content of the actual evidential processes and

procedures that comprise the audit. Perhaps not surprisingly, the emphasis on

firms‘ audit approaches on risk based auditing and the importance of planning in

the conduct of the audit also appear to be significant in the way in which the quality

of the content of the audit process is understood.

“Well I say audit quality we have a phase, which is risk and quality. I mean

we tend to sort of have the two very much allied together...Well I think they

are pretty good bed-mates… our audit approach is very much designed to

focus on risk, risk in the business and identifying significant risks and

focusing our audit work on the areas of key risk and higher risk and,

therefore, I think addressing those key risks adequately should lead to a

good quality audit. Then clearly you need to do all the compliance bits

around the edges, however, if you are addressing the key risks within the

business and as long as you have identified the key risks correctly to start

with then I think that should sort of lend itself to fundamentally moving

down the path of the high quality audit” (AP3).

From the interview comments, it can be deduced that various representations are

negotiated, developed and sustained within an audit firm in constructing the

meaning of audit quality in practice. This highlights the significance of the various

symbols in constructing social realities and in impacting behaviour and action. The

meaning of audit quality, as articulated by the audit partners includes such symbols

such as comments through references to the way auditors carry out the audit and

policies and procedures established and implemented within the audit firm.

For instance, academic qualifications, trainings, recruitment process, internal

quality reviews, audit partners, coaching, business risk auditing, audit planning and

consultation within the audit firm are some of the important aspects of behaviour

and ‗objects‘ that were discussed in the interviews as representing audit quality.

5.4. Quality Conflicts in Practice

Having identified a number of elements concerning the meaning of audit quality to

practitioners, it should be recognised that these elements cannot easily be ranked

or placed in a hierarchy of importance or influence. Rather, there are likely to be

tensions and conflicts between the activities necessary in order to deliver the

competing elements and consequently potential choices in the conduct and content

of what is done in any individual audit engagement. Auditing is not a unitary

phenomenon and can mean different things to different people (Humphrey, 1997)

and, similarly, audit quality can hold different meanings for different constituents

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because of their divergent interests and expectations. To the extent that the

elements of the meaning of audit quality for the audit partners interviewed reflect

attention concerning the varying interests of different constituents, then emphasis

on specific elements will affect audit practice. The interview comments provide

evidence that auditors recognise the diverse expectations of other constituents in

the audit setting regarding audit quality and the associated perception gaps that

can create role conflicts for auditors and the profession (Mills and Bettner, 1992).

As implied in the quotes below, auditors perceive that different roles are expected

by various constituents in the auditing environment. Consequently, some of the

audit partners recognise the expectation and perception gap concerning their roles.

“My guess is that the public has a very ill considered view of what audit

quality is, audit quality is a lack of failure in a quoted company.....from a

client‟s perspective, I guess the feedback we have is that a lot of quality

issues from a client‟s perspective are due to financial reporting actually

rather than audit quality. Again, their view is that what goes out in the

public domain is the set of accounts and then sometimes they are more

interested in whether the accounts comply with the accounting rules rather

than the quality of the audit and the challenge.....if you talk to all the

committees, there would have to be a challenge from the auditors to the

management and I think the quality seen at that level is the degree of

challenge. In addition, probably because people are very practical, I think it

is just the way in which the audit is done, it is very much seen as the quality

of the audit, so just the effectiveness of the process, the relationships built

up and just looking at your timetables” (AP5).

“I think there is still this huge perception gap between what the public at

large think an audit involves and actually what it does involve and I mean I

think the public expect us to be sitting there adding up lists of numbers and

checking every invoice that the company has issued and they have no real

idea and, maybe, they do not want to know. I mean they would be surprised

in a sense that where you have a strong control environment how little

detail testing sometimes actually goes on and you obtain your comfort

elsewhere...” (AP3).

Audit quality in practice will frequently be viewed from the perspective of the audit

clients. For this reason, public or regulatory interests may be in conflict with the

auditors‘ and clients‘ financial interest. The quotation below highlights one auditor‘s

view about the potential conflict between compliance obligations and commercial

values, that is, between the different interests of satisfying the expectations of the

regulator and other objectives (e.g. profit maximisation) of the audit firm. The

commercial and competitive forces that affect the audit market may create conflicts

in practice, in particular, concerns about the cost of audit (either from the point of

view of client management or the audit firm itself). A quality conflict arises because

auditors are faced with practical choices about providing high quality services at a

reasonable price (Mills and Bettner, 1992).

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“…and then, I suppose the other thing is the commercial pressure, in a time

of recession, profits are lower, people are trying to do more with the time,

people are trying to do more in the time they have got available, are you

getting things right from that perspective? In a recession, it can give rise to

more challenge to audit quality” (AP5).

“The two main levels to make more profit on an audit, first it is the amount

you spend on the audit and second there is the seniority of the people you

put on the audit... so I think there is clearly a conflict there between making

a significant profit and good quality audits” (AP6).

The analysis also suggests possible tensions in various areas of audit between the

audit regulator and the audit practitioners. For instance, the following quotes

highlight possible tensions concerning the appropriateness of the audit opinion as

well as the sufficiency of the audit work and the adequacy of audit documentation

during interactions between the audit partners and the regulator.

“There was probably less emphasis on file completion 15 years ago.

Certainly, if the partners felt that there was enough evidence on the file,

then that was pretty much enough really. Now it is the perspective where we

have a very stringent control over closing down of files. We have a files

review to see whether we got the right things on file from a completion point

of view. Have we got the right sort of approach documents on file and that is

done with the regulator in mind. That is what I would say drives what quality

of audits now. As we provide better opinion, are the accounts more accurate

now than they were 15 years ago? I am not convinced to be honest” (AP2).

“I think we probably are more regimented in documentation...I think the

standards are very demanding and if you look at the audit inspection unit‟s

approach to reviews, sometimes they seem to want even more documents

than we think is necessary” (AP5).

During the interviews the auditors also made reference to a potential conflict

between what has been described here as the element of compliance obligations

and that of professional values. For example, comments indicated that a tension

between these dimensions is reflected in the procedures through which audit

engagements are evaluated within the firms themselves. As suggested by Curtis

and Turley (2007), in the audit firm setting there is tension between the

practitioners and the firm‘s ‗administrator‘, that is the managerial control part of

the firm. Most commonly, this idea is present in views complaining about a

potential emphasis on completing checklists – that there is a conflict between

ensuring that the audit involves the exercise of professional judgement and ‗box

ticking‘ to satisfy internal and external compliance obligations. In the words of one

audit partner:

“One of the frustrations of the audit partners within this firm is that

sometimes we come down on the side of quality evaluations that end up

being basically a huge check list, tick what have you done, have you done

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these 900 things on your audit …and it is basically yes or no and for every

no answer you justify why it is a no answer and if you have got lots of no

answers then potentially that becomes an issue as to whether you have

done a quality audit...” (AP3).

Generally, the auditors interviewed regarded attaining high audit quality from the

perspective of their clients as their highest priority. That perspective may give rise

to a further conflict between the desire to fulfil commercial values and the auditors‘

perceptions of what is appropriate in terms of professional values. As stated by one

interviewee:

“You will always get a partner and if it is a relatively small, or what appears

to be a relatively small client, that partner can get too close to an audit

client. They can get sucked into a position whereby they will do something

out of a desire to provide client service and they will see it as a client service

objective and, like I say, we are a client service firm and they will not see

the difference between a client service and audit quality. I think that is a

very difficult thing because we preach message to the staff that we must

provide good client service, you must do a good quality audit and they are

not always the same. And being able to identify and being able to ensure

that our partners can identify where there is a conflict, is important. So, in a

way, is something that worries me. I suppose the other thing is the

commercial pressure, in a time of recession, profits are lower...In recession,

it can give rise to more challenging audit quality” (AP5).

Collectively, the existence of these conflicts suggest that for the individual audit

practitioner the process of attaining what he or she considers to be an audit of

suitable (high) quality is likely to be complex and may involve considerable

tradeoffs between conflicting pressures. In that sense, the ‗process‘ of audit quality

is more multifaceted than simply the presence of certain signals or attributes

associated with the inputs supplied to the audit engagement or the characteristics

of the financial statements after completion of the audit.

5.5 Perceptions Concerning the Impact of the Role of the Audit Committee on Audit Quality

This section reports on comments made by the interviewees regarding the extent to

which interactions between auditors and the AC influence audit quality in practice,

which addressing research question 4. First, each partner was asked a question

about their general view with respect to the overall role of the AC. On the whole,

the majority of them agreed that the role of the AC has strengthened in the last few

years. Some of the partners indicated that the AC was now seen as being more

rigorous and critical in their approach than had previously been the case. For

example, the AC was taking an active role in their oversight activities through

questioning, challenging and discussing critical accounting and audit issues, the

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audit approach and the results of the audit with the audit partners. The AC

sometimes asked for additional reporting or further detail on the auditors‘ work but

there is little evidence of the AC having a direct influence on the design of the audit

work. Others noted the important role of the AC regarding matters such as auditors‘

fees and enforcing additional pressures on management concerning difficult issues

that emerge during the course of the audit that can facilitate the process of

conducting an audit.

“They are demanding more from the auditors and the auditors are

acknowledging their central role... Increasingly I am seeing that audit

committees are taking a robust position, which is very noticeable...in terms

of influencing or changing procedures, my answer will be no, on the

assumption that there is no reduction on procedures. Would they sometimes

ask us to do additional work in relation to that in addition to what is required

to the audit. Sometimes, not the norm but sometimes when there are

specific issues that really everybody knows are on the table from day one,

only sometimes would I say they actually request additional work”(AP1).

“the audit committee has been very supportive of us in terms of the

approach that we want to take in respect of that audit and to the point

where they basically, even though I mean naturally we are under sort of fee

pressure in the current market place, they have said “we want you to go and

do a good, thorough audit of that and we are really interested in what your

findings are” and in a sense, well keep an eye on the cost but do not worry

about the cost because we want you to go away and do a good audit which

is a slightly different message than you get from the FD because yes she

wants a good audit but ultimately she wants to tie us down to a fee as

well..... So, I think there are lots and lots of areas where you can have good

sort of robust but educative and informed debate with the audit committee,

which then actually does have a sort of positive impact rather than just

trying to sort of agree with the FD” (AP3).

Most of the audit partners also took the view that the effectiveness of the role of

the AC was very much dependent upon the individual characteristics of the

chairman of the committee. The audit partners regarded the knowledge and

understanding of the chairman concerning auditing, financial reporting and the

client‘s business, experience and their judgement to be an important part of the

characteristics for the AC to be able to fulfil its role and its responsibilities

effectively. At the same time, the audit partners perceived that the approach of the

AC was varied and that it was very much influenced by the chairman of the AC.

They also perceived that the chairman would be likely to influence the type of

working relationship that existed between the auditors and the AC.

“It varies on the personalities involved on the non-executive side. They will

ask detailed questions of the auditors and have a very good understanding

of the accounts. Others will be much more hands off, they do not

particularly want to see any report from the auditor. Others will be

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challenging in terms of the information that they get from the auditor, in

terms of the approach, in terms of the planning approach, the result of the

work. It usually manifests itself in a way, I do not understand that number

or that area in the accounts, can you explain that and deep-deep down that

way. It does come down to the individual” (AP2).

Although there was a general agreement among the audit partners that the role of

the AC has strengthened over the years, there were mixed views in relation to the

impact of the role of the AC on audit quality and content or conduct of the audit.

Some of the partners believed that the role of the AC influences the knowledge of

the auditors by enhancing the auditors‘ understanding of the client‘s business. They

believed that discussion with the AC on various business issues enhanced audit

quality. Others mentioned the greater need to show that they posed sufficient

‗challenge‘ to the company‘s management in accordance with the expectations of

the AC. As implied in the above quotations, there is evidence to suggest some

impact from the AC on the content and conduct of an audit where there are

instances in which the AC asks for additional work or detailed reports, questioning

and challenging the work of the external auditors. In contrast with Cohen et al.

(2002), the interviews evidence suggests active roles of the AC in their interactions

with the external auditors.

Nonetheless, some partners viewed the role of the AC as being more related to the

quality of financial reporting, that is, the output of the audit rather than the

‗process‘ of audit quality. They mentioned that a great deal of interaction and

discussion with the audit committees focuses on the financial reporting and

business issues rather than audit issues or the procedural aspects of the audit

engagement. Several of the partners opined that there was little contribution of the

AC with respect to the conduct of the audit. The following comments summarise the

divergent views of partners on this issue:

“I think having a good understanding with the Audit Committee will enhance

audit quality because if you have an Audit Committee member who is close

to the business you can share ideas and very often they can give you their

perspective and their insight of what is happening...I think that enhances

the auditor‟s understanding of the business and the business issues” (AP9).

“I think the existence of audit committees and the quality of those audit

committees has been a huge benefit. It has been very beneficial in terms of

improving the quality of audit financial reporting, and, therefore, by

definition, the audit opinion. I would say audit committees are more attuned

to financial reporting obligations and the financial reporting requirements

than they are of audit regulations, so you will have far more discussions with

audit committees around accounting issues than you would around audit

issues” (AP8).

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Analysis of the evidence from the interviews demonstrates greater interaction and

communication between the auditors and the AC over the years. For instance,

beyond the formal business of the regular meetings, significant informal

interactions occur between the chairman of AC (e.g. informal meetings and

telephone conversations) and the auditors. The auditors have regular informal one-

to-one contact with the chairman of the AC. During these informal interactions, the

chairman expects the auditors to keep him/her informed of emergent accounting or

business issues and this informal discussion also aims to brief the chairman about

reports to be formally submitted to the committee. Informal interaction also

provides an opportunity to discuss potential conflicting issues before meetings or

solving problems in advance of AC meetings. Further, these informal interactions

are an important aspect of the relationship between the AC and the auditors. In this

respect, auditors can be open and honest about the difficult issues that unfold

during the conduct of the audits or answer sensitive questions concerning the

competency of the management. Several partners perceived their relationship with

the AC as interactive, productive and effective. However, there were also comments

that reflect a more passive relationship.

“I have informal meetings before every audit committee meeting I will have

an informal meeting with the audit committee chair… maybe a call or a catch

up so there will be interaction between myself and the audit committee chair

before each key meeting and then during the year end audit we will be in

contact once or twice a week and we will probably have a lunch or an

informal meeting once or twice during the year so quite a lot of interaction”

(AP9).

“[if] you have got a good relationship you pick up the phone to the chairman

of the audit committee and just make sure they are aware of any issues, so

they can put pressure on management to address it. They have the

opportunity to engage and get themselves up to speed on the issues before

the relevant meeting...a good relationship is where you can have an open,

honest relationship with the audit committee and they do not immediately

turn round and just go back and tell senior management what you have told

them, they use their experience and judgement as to how to present it back

or whatever, so you would expect the formality of the meetings and then

you would expect some sort of informal contact as well to ensure that there

are no surprises and you can both use them as it were to help” (AP10).

The evidence from the interviews also suggests that more detailed reports are

prepared for the AC. In terms of the content of the reports, a significant part of the

reports concentrate on highlighting key audit issues that emerge in the

performance of the audit. The interviewees also stated the importance of showing

that they are challenging the management on those audit issues.

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“I think the time devoted to audit committee report preparation content is

much greater than it was. In terms of the style of reporting in the final

report we increasingly focus on the key audit issue” (AP1).

From the analysis of the responses, it can be deduced that there were mixed views

about the beneficial impact of the AC in promoting audit quality. Nonetheless, most

of the auditors acknowledged the effective role of the AC in achieving financial

reporting quality rather than audit quality. The audit partners also recognised

greater interaction and communication between them and the AC, which they

perceived as being beneficial to the audit quality.

5.6 Summary and Conclusions

This study adopts a symbolic interactionist perspective that offers an alternative

framework to examine multiple meanings and various symbols of audit quality, the

influences behind the construction of those meanings, and potential quality conflicts

in practice. Primarily, this study suggests that audit quality can simultaneously hold

different meanings for individual auditors. Three key concepts of audit quality in

practice are identified. First, the concept of audit quality is related to the

professionalism of the individual auditors. Second, concepts of audit quality concern

the compliance obligations of the practitioners to the relevant auditing and

accounting standards, and the related aspects of internal and external quality

assessment. Finally, commercial or entrepreneurial values influence the

practitioners‘ notion of audit quality. The study also reveals that commercial values

are far more influential than others, such as compliance obligations, to the way in

which notions of meaning of audit quality in practice are understood and the way

audit is carried out in practice. Further, these multiple interpretations of meanings

emerge from the different ‗roles‘ played by the auditors.

The empirical evidence on the perceptions of audit quality by audit partners

provides some interesting insights. The general pattern based on the responses

indicates that the auditors attach different meanings to audit quality, which are

influenced by various expectations, interests and concerns by different constituents

in the auditing environment. This is consistent with Turner et al. (2010) who view

auditing as a multi-service activity that serves different types of customer groups

that judge quality differently, for example, the compliance obligations and

professional values as a result of public, regulatory and normative pressures

(DiMaggio and Powell, 1983) in the auditing environment underpinned by the need

to legitimise the conduct of the auditor to build and maintain the trust and

confidence of the public at large concerning the quality of their services.

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Compliance obligations are important for the auditors to legitimise their own

standards and overall audit methodology and processes to the outside constituents,

as argued by Scott (2001); legitimacy relates to social acceptability and credibility.

The auditors‘ professionalism, reflected in factors such as professional judgement,

competence and independence is represented by symbolic representations such as

academic qualifications, training, technical guidance and consultation. These

features were frequently described in the interviews and constitute a major part of

the production of quality in practice. Further analysis shows that the auditors make

these recommendations based on their claim to expertise and knowledge, which

becomes one of the fundamental concepts that gives audit its value. As suggested

by Richardson (1988), auditors‘ claim to have knowledge that is important for the

protection of professional privileges and autonomy of power that is enjoyed by the

audit profession. In this respect, the compliance obligations and professional values

concepts of audit quality are important to reflect the audit as a profession that is

connected to the value of an external audit.

The analysis suggests that commercial values influence how auditors perceive audit

quality and this reflects the business of auditing (Power, 2003). The competitive

and commercial pressures on the audit market significantly affect the profitability

and survival of the audit firm. As a result, to increase profit, meeting client‘s

expectations and providing value added services drive the idea of the concept of

audit quality in practice. The results show that the commercial interests become the

audit firm‘s organisational values system that influences the production of ‗quality‘

and the commercial concerns affect every aspect of auditing (Sikka et al, 2009).

Further reflections on this issue reveal that the power asymmetry and task

interdependence may put additional pressure on auditors to deliver the ‗quality‘

that is expected by their audit clients. The auditors‘ appointment and re-

appointment and determination of the audit fees are decided by the client‘s

management (Gavious, 2007). This condition has important implications for the

concept of audit quality in practice, thus showing the importance of the concept in

relation to the audit as an ‗industry‘.

Overall, the analysis indicates that the concepts of audit quality in practice are

changing and moving as they are subjected to social, regulatory and economic

pressures. Auditing practices are interacting with the internal and external

pressures for quality in the auditing environment that constantly change practical

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framed of meaning of audit quality for the audit practitioners. In a sense, audit

quality is subjectively constructed and changes with context.

It is notable that the audit partners‘ configuration of meanings are reflected to

some extent by symbols and the construction of the notion of audit quality that

focuses on the inputs and processes of the audit rather than the outcome.

Regarding the input of an audit, the audit partners emphasised that the quality of

people is key in the production of a quality audit, in which various quality symbols –

codified rules, auditing standards, professional examinations, training, coaching and

consultation - are reinforced and recognised as giving some dimension of audit

quality in the auditor‘s mind. These symbols are important to establish and

legitimise abstract audit knowledge.

Concerning the processes, the audit partners emphasised audit judgement, asking

challenging questions, internal quality review, audit planning and risk analysis as

essential for comfort in ensuring production of audit quality. These processes and

procedures provide the representations of audit quality, that is what audit partners

see as tangible indications of quality in the absence of more observable features of

audit quality. Overall, the meaning of audit quality in practice is operationalised

through various representations in the inputs and the audit process for the

members in practice and to other external constituents with whom they interact.

This chapter also argues that audit quality in practice is more appropriately

envisaged as a set of persisting conflicts and tensions, which result from the

mutually related and competitive dimensions of audit quality. There is conflict

between practitioners‘ values and institutional demand for acceptable

representation of audit quality. The first tension is between compliance obligations

(in particular, external compliance obligations) and the professional values of the

audit practitioners. Observation from analysis of the interview comments highlights

that this tension is an important issue, as there is a continuous battle between the

practitioners and the regulator (the AIU) in controlling who can lay down the

parameters of the work that the auditors do. In the UK the introduction of the AIU

by the FRC has introduced a prominent actor in the auditing system that might

have a different conception of what audit quality is.

It appears that the regulatory changes regarding what constitutes quality translate

into anxiety and unease in the audit partners‘ understanding of the concept of audit

quality. To her/him, recent regulation removes the ‗status quo‘ in the audit, which

implicitly undermines the professional judgement, expertise and knowledge

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possessed and claimed by the auditors. The effort is sometimes viewed as de-

professionalizing the audit profession through removing the status of the public

accounting firm as a ‗profession‘ and the professional power that is perceived as

threatening the core existence and survival of the audit profession. These feelings

were articulated during the interview when the auditors voiced their concerns about

changes in the nature of audit practice – the change from using professional

judgment to audit practice that is prescriptive.

In general, the overall impression that emerges from the interviews discussed in

this chapter is that what is considered as ‗quality‘ in practice, as perceived by the

auditors, is without doubt the outcome of social relations, which is consistent with

the argument offered by Power (1996; 2003) contesting the dominant view that

‗quality‘ is objectively constructed by following relevant standards and applying

appropriate auditing techniques. This study argues that audit quality in practice is

socially constructed. This shows that the meanings of audit quality represent

diverse issues including legitimacy, image management, role conflict and the

survival of the audit profession.

In conclusion, this chapter shows that: (i) the audit partners perceive multiple

meanings of audit quality in practice, (ii) the perceptions of the audit partners

concerning audit quality are influenced by internal and external factors, such as

commercial and regulatory factors in the audit environment, (iii) various symbols

are operationalised and communicated to signify meanings in practice to gain

legitimacy and ensure survival of the audit firm, (iv) quality conflicts exist because

of multiple roles performed by the external auditors, (v) the AIU influences the

meaning of audit quality in practice, and (vi) the AC has minimal impact on the

content and conduct of an audit.

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Chapter 6

Audit Committee Members’ Perceptions Concerning Audit Quality in Practice

6.0 Introduction

The purpose of this chapter is to set out the results of the interviews that were

conducted with AC members to elicit their views concerning the meaning of audit

quality, factors that influence the construction of that meaning and the

representation of that meaning in practice. The background to and structure of the

interviews and the methodological approach to the analysis of the evidence

collected were described earlier in the thesis (see Sections 3.2 and 3.3.1.2

respectively); this chapter presents and comments on the views expressed.

The chapter is structured as follows. Section 6.1 addresses research question 1,

and describes multiple meanings AC members associate with audit quality in

practice. Section 6.2 discusses factors that shape and influence the construction of

the meanings of audit quality, thus addressing research question 2. Section 6.3

examines how the meanings of audit quality are represented in the operation of the

AC, which is the subject matter of research question 3. Section 6.4 addresses

research question 5 and discusses the impact of the AC on the external audit

function. Section 6.5 provides a summary discussion of the findings and the

conclusions of the chapter.


The thematic analysis of the responses demonstrates that the AC members

predominantly frame their meanings of audit quality around four important

constructs. First, the notion of audit quality is related to the characteristics of the

audit firm. Second, the idea of audit quality is associated with the concept of

professionalism of the external auditors and includes professional attributes, values

and the reputation of the external auditors. Third, AC members place greater

emphasis on external auditors‘ own assessment and discussion of risks in

operationalising the meaning of audit quality in practice. Finally, the concept of

audit quality is connected with a construct concerning the credibility of the financial

information that is produced by the management. The discussion that follows will

show that the four elements serve to give structure to the meaning of audit quality

in practice.

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6.1.1 Characteristics of the Audit Firm

The first meaning of audit quality expressed by the AC members concerns the

attributes of the audit firm, thereby linking audit quality with the size, reputation

and industry expertise of the firm. Consistent with the dominant audit quality

discourse (e.g. DeAngelo, 1981b; Knapp, 1991) the majority of the AC members

interviewed associate audit quality with the size of the audit firm. The interviewees

perceived that Big Four audit firms or larger firms can provide a better audit service

because they have adequate resources in terms of people, systems and processes

to provide a high quality of audit service.

“Most of the companies that I have been involved are large companies, very

large and some of them are international. Sometimes the issues been dealt

are complex and difficult. I think another aspect that important is the

experience of the auditor who has well place to be able to deal with all

aspects of the audit issues that might arise. Perhaps a large audit firm would

be better to deal with a large complex company. That would be my opinion.

If the company is international and global then I would think that the type of

the auditor that to be used should also international and global. They have access to expertise, knowledge and resources” (AP1).

The AC members expressed the view that the larger audit firms can attract more

highly skilled employees and that the Big Four firms have sufficient capacity to hire

and train the best people. As a result, they believed the big firms have sufficient

resources in terms of quality people, their competence and experience to carry out

the audit. The Big Four firms are also believed to have strong quality control

systems connected to the audit process and a strong audit methodology or

approach that is associated with higher audit quality. Furthermore, the AC members

believed that the big size audit firms have strong policies and internal procedures in

place that monitor and facilitate the audit process.

“First of all I think you want to make sure you are dealing with an audit firm

that has a very strong worldwide reputation...we are working with the Big

Four. There has been a lot of debate recently, in which I have participated,

about whether public companies could use non Big Four auditors to a certain

extent. While I would not rule that out I think you would feel a lot more

comfortable with one of the Big Four because they have strong internal

control procedures themselves and they have back up partners who review

the work on the audit” (AC5).

The AC members also emphasised that larger audit firms can provide high audit

quality because of their reputation, industry specialisation and experience. During

the interviews, the AC members emphasised that the special skills and knowledge

of the audit firm concerning a particular industry can bring greater in-depth

understanding to the unique audit risks that will be reflected in audit quality. The

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larger audit firms are also perceived to have greater ‗international‘ experience and

better practices, which are important and beneficial for international and complex

companies.

“If you are choosing between those Big Four...experience of your industry.

That is one place where the firms will differentiate because they have

different strengths in different industries” (AC10).

It was apparent that the perception of the AC members concerning the meaning of

audit quality depends upon observable features of audit quality such as size,

reputation and industry specialisation of the audit firm. In general, the

characteristics of the audit firm as a construct of audit quality is important to signal

audit quality through selection of credible and high quality auditors.

6.1.2 Professionalism of Individual Auditors

Another construct reflected in the comments expressed by the AC members links

audit quality to the professional attributes, professional values and professional

appearance of the external auditors. Similar to Schroeder et al. (1986) and also to

the evidence obtained from the other two groups (audit partners and quality

inspectors) in this study, analysis of comments suggests that AC members

perceived the professional attributes of the audit team or individual auditors to be

an important construct of audit quality. All of the AC members identified

competence and knowledge and experience in the industry or with the client to be

critical attributes for auditors to be able to deliver appropriate audit quality. For

example, experience and knowledge are essential for the auditors to understand

and identify risks and issues faced within a particular industry. These attributes

allow auditors to identify strengths and weaknesses in the processes and

procedures of the audit client‘s internal control and accounting systems. The AC

members also elaborated upon the importance of the technical skill of auditors -

sound understanding of accounting standards that reflect audit quality because of

the financial reporting regulatory requirements.

“I would be very concerned if I thought there were close personal

relationships between the audit partners and our auditors and the senior

executive...I think that is very important, and I think when it comes to

failures, it will very often relate to the judgement of an individual auditors”

(AC6).

The quotation below implies that the appearance of professionalism and the

behavioural and interpersonal skills of auditors are very important attributes when

AC members reflect on the meaning of audit quality. In this light, the AC members

expressed the view that auditors‘ interpersonal skills are important for them to feel

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comfortable and confident that the auditors are delivering a high audit quality. In

other words, the AC members felt that the auditor should be able to demonstrate

his/her ability to identify, describe and articulate issues during interactions and

communication with the AC. The auditors should also be able to demonstrate the

ability to listen and respond to questions. The AC members also referred to the

importance of auditors‘ behavioural skills – gestures, the ability of auditors to

interact, relate and respond during interaction and communication with the AC

members and with others (such as the management and the internal auditors), as

reflecting audit quality. In general, most of the AC members considered the

interpersonal and behavioural skills of the auditors to be very important for

perceptions about audit quality.

“They (external auditors) also need an interpersonal chemistry...an ability to

listen...somebody who is highly competent technically but cannot talk to

people in the factory or the office is not going to be as productive. I am

interested in the interpersonal skills of the auditor because that is the way

they collect a very large amount of their knowledge. Therefore there is an

element of chemistry and behaviour and then if you couple that with

technical knowledge and ability to talk about the subject, to reciprocate in

some ways. Then you hear him talking about it and you will think he knows

his job and you will feel more comfortable” (AC8).

Overall, the above analysis indicates that the auditors‘ professionalism, comprising

professional characteristics, values and appearance, is important for audit quality,

and dominates the idea of meaning of audit quality for AC members. Whether the

auditors have delivered sufficient audit quality is related to the extent to which the

AC is persuaded by their ‗presentation‘ of the audit rather than detailed knowledge

of the process of the audit itself. This may not be surprising because the AC

members are not in position to examine the process and conduct of the audit in

detail. This finding is in line with Carrington (2010) who identifies the appearance of

professionalism as a construct of audit quality in the absence of a clear relationship

between inputs (the external auditors‘ professional attributes and values) and the

process of the audit.

6.1.3 Risks Orientation

In the interviews, the AC members generally saw the auditors‘ presentation and

discussion in the area of risks as giving structure and meaning to the concept of

audit quality in practice. The AC members believed that external auditors‘

understanding and assessment of risks can enhance audit quality in two ways. First,

the identification and assessment of risks by the external auditors will be likely to

influence audit planning and approach, which can influence the sufficiency of the

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audit work in the conduct of the audit and the resulting outcome of the audit.

Second, it would ensure that the external auditors focus and challenge the

management on the right key issues and make certain that they form their

judgement on the right key areas. This finding highlights that the ability of the

auditors to present and communicate on business issues and in particular risks are

important to convey an impression of their expertise, knowledge and competence

and will be taken to reflect their ability to deliver audit quality.

“So audit quality is that the risks to the enterprise are being managed

effectively. The AC is really looking at the risks to the enterprise, more

important than are they adding up the numbers correctly” (AC4).

“What does audit quality mean to the Audit Committee? Well it is ensuring

that when the plan is originally devised it focuses on the right things, that it

is cognisant of the key risks in the business and that it is focused on

ensuring that there are the right controls in those areas. In addition, the

judgements that the audit focuses on are the ones that are critical to the

risks in the business. Therefore, audit quality is about that sort of mapping

between the business and its risk profile, the environment in which the

business is in” (AC6).

In general, the area of risk is important for the AC members to be comfortable with

the quality of the work performed by the external auditors and is one of the

important features in the discourse of audit quality among the AC members. This

finding is consistent with Gendron et al. (2004, p. 166), who identified external

auditors understanding, assessment of risks and associated audit planning as being

an important part of the perceptions of AC members concerning audit quality. In

like manner, the first group (audit partners) in the study also expressed views

about the importance of ‗risk‘ in delivery of high audit quality. In this context, the

presentation and discussion about risks by the auditors gives structure to the AC

members‘ attention and directly guide their conception of the meaning of audit

quality.

6.1.4 Financial Reporting Orientation

During the interviews, the AC members strongly associated financial reporting

quality with the meaning of audit quality. The interviewees connected attributes

such as compliance with the accounting standards and accuracy of the financial

information to the dimension of financial reporting quality. It was apparent during

the interviews that the majority of the AC members strongly associated audit

quality with the reported numbers on completion of the audit and the resulting

outputs, which is the audit opinion. In general, they regularly mentioned the

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important role of external auditors to ensure the credibility of the financial figures

produced by the management, which reflect audit quality.

“I want to know the company‟s results that we present to the outside twice a

year, the figures that we are presenting and what we are saying about those

figures, an accurate and fair representation of what is actually

happening...are the disclosures that we are making the disclosures that we

should be making...there is integrity in the numbers, the profits of the

company are being fairly and accurately stated...that‟s what I‟m looking for,

that is what I think about audit quality...integrity of results” (AC11).

“It is very clearly laid out what the auditors are expected to do, so the audit

quality...It has to be seen at the level of what work has to be done in order

to form a clear, coherent, definitive picture of the company‟s finances”

(AC7).

The AC members mentioned that they are very interested to receive some in-depth

discussion about half year and full year financial results from the external auditors

to give them comfort about the quality of their work. The AC members also pointed

out that discussion between the AC members and external auditors are normally

centred on the application and resolution of accounting issues or standards, such as

impairment, revenue recognition and interpretation of new accounting standards,

which might have an impact on the reported financial results of the company. It is

evident that most of the AC members are concerned that there is ‗no surprises‘ or

any potential threat of audit qualification because of the management‘s accounting

choice. Accordingly, audit quality is connected to the ability of the external auditors

to demonstrate that they pose ‗significant challenge‘ to the management about

various accounting issues related to the company as expressed by the following AC

members:

“The way numbers are presented, the accounting standards actually give

you quite a lot of scope in terms of net income, profit and all that sort of

thing, the way numbers are manipulated as opposed to just the straight

operating cash flow which is the really hard number. I think the quality you

look for in the external auditors is really whether they can go a little further

than the management can go and say what about this, what about that”

(AC4).

“What do I see as audit quality?...I would expect there to be what I call a no

surprises environment...to be open about issues and get to them early and

get the auditor engaged in them, this is what I mean by issues; how are we

going to approach impairment this year? How are we going to tackle this

new accounting standard? How are we going to get on with revenue

recognition? (AC3).

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In this context, the underlying rationale is that the AC members want the external

auditors to keep them out of trouble, so therefore, the auditors are expected to

object to or challenge the management on accounting policies that might lead to

problem in the future.

“The sort of thing that really cheeses off the executive is when external

auditors change their mind about something, very close to our half year

reporting time. What you always want is that the external auditors sign off

and give you a clean bill of health on the accounts. The last thing you want

is to have queries being voiced publicly. So what we do not want is that

things change late on in the piece. It is very important that if external

auditors have got concerns that those are flagged to the management and

the AC early, so actions are taken to resolve the concerns” (AC4).

In general, the AC members emphasised a notion of financial statement quality

where the focus is on the validity of the reported numbers and compliance from an

accounting perspective. The quality of the financial statements dominated the AC

members‘ perceptions of audit quality rather than a technical interpretation of the

quality of the audit process. This perhaps reflects the unobservable nature of audit

quality and the AC‘s focus on the output of the financial reporting process.

Having identified different constructs and attributes of the concept of audit quality

held by the AC members interviewed, and illustrated how these constructs featured

in the members‘ comments, the discussion below relates those constructs to the

broader regulatory and societal factors that influence the construction of a practical

meaning for the concept of quality.

6.2. Factors that Influence the Construction of the Meanings

of Audit Quality

This section attempts to answer the second research question, that is, to look at

factors that influence the process of construction of the meaning for audit quality.

In particular, it explores the influence of broader societal and regulatory and the

concepts of role expectations and self-image on the meanings of audit quality. It is

relevant to recognise that AC reform has resulted in tighter standards and

regulations that have demanded greater roles for the AC to oversee the external

audit function. The AC is now required to approve the appointment and

remuneration of the external auditors. They have also been given responsibilities to

review auditors‘ independence and the effectiveness of the audit process, and to

approve commissioning of non-audit services from the incumbent audit firm. At the

same time the collapse of businesses has brought about criticism of the role and

effectiveness of the AC as a control mechanism in the governance structures and

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has threatened their legitimacy. For these reason, there is an increased need for

ACs to demonstrate the legitimacy of their behaviour to conform to their role

expectations and maintain their credibility. The discussion that follows will show

that role expectations and legitimacy influence the meaning of audit quality, as

perceived by the AC members.

One element influencing the AC members‘ sense of meaning for audit quality

derives from their own monitoring responsibilities. To some extent this can be seen

as consistent with the present regulatory approach, which emphasises the role of

‗those charged with governance‘ for making auditing and financial reporting

effective. Accordingly, how the AC perceives their role will be likely to shape and

influence the meaning, operation and representation of audit quality which should

be consistent with the concern for high standards of corporate governance. For

instance, the UK Corporate Governance Code (C.3.2) outlines that the principal

roles of the AC include monitoring the integrity of the financial statements,

reviewing significant reporting judgements and reviewing risk management

systems. Frequently during the interviews the AC members mentioned these

features as attributes of audit quality. The quotations below show how the expected

role of AC members in reviewing risks influences the construction of the meaning of

the audit quality. For instance, the auditors‘ reports, presentations and discussions

in the area of risks seem to dominate the AC members‘ perceptions concerning

meaning of audit quality. As implied in the quotations, the AC members perceived

that their role is centred on monitoring of the business‘s risks and believe that one

important function of the external auditors is to support that role. Some of the AC

members also believed that the value of the audit comes from the ability of the

auditors to assess the risks of the business and their impact.

“If I think of the role of the AC and the role of the external auditors, the

whole process revolves around risk, that is the key word” (AC11).

“I would say there is not a great value to the audit other than there is one

exception, from my point of view, the auditors can highlight risk that I have

not picked up through the normal channels. I am particularly interested in

the auditors‟ assessment of risk or any information that helps me to assess

risk” (AC9).

The AC members also emphasised that to some degree comfort about audit quality

is related to his/her financial and auditing background. Frequently, during the

interviews, the interviewees felt that their experience is significant for them to fulfil

their oversight responsibilities because assessment of audit quality involved

considerable judgement. Similar to DeZoort (1997), the evidence from the

interviews indicate that the perceived oversight role of the AC of the external audit

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is related to the background of the members and their knowledge and experience in

the financial, auditing and business sectors, which is consistent with regulatory

recommendations (The Smith Committee Report, 2003; The UK Corporate

Governance Code, 2010). One of the interviewees compared the nature of their

work to the external auditors, which involved gathering information as evidence to

support their judgement. A number of the AC members described a process of

triangulation of information that is gathering of various information provided by the

external auditors, the management and the internal auditors to assess audit

quality.

“The chair of the AC is likely to have been a finance director himself with

financial and auditing experience and it is therefore reasonable to assume

that he will have a fairly good eye as to whether the job is being done

technically to a reasonable standard” (AC11).

“I am a professional accountant and know about auditing so that contributes

an important part to the discussions that I have with the audit partners and

the audit manager” (AC5).

Nevertheless, the interview evidence suggests that the expected role of the AC to

monitor audit quality is somehow challenging and problematic for the AC

themselves. As suggested by Roberts and Dietrich (1999, p. 981), for the purchaser

of professional services, assessing performance of services can be problematic due

to an information problem: that the attributes of quality service are not identifiable

and the activity of the producer of the services is unobservable. In the case of audit

services, the notion of audit quality is obscure, the characteristics of ‗good audit‘

are not known and the AC has a limited capacity to observe the conduct of the

auditors or the process of producing the audit.

For example, analysis shows that the perception of the AC members about size and

audit quality is based on a ‗taken for granted assumption‘ about the processes of

and inputs to the audit services because of the unobservable nature of audit

quality. The following quotes illustrate the importance of that assumption for the AC

members to feel comfortable with the audit quality; the reason being because of

the limited ability of AC members to examine the audit process and procedures of

audit firms.

“I think if you are working with the Big Four auditors the honest truth is that

you take the general systems for granted...You do not go and study the

details of their procedures...one of reason for having one of the Big Four as

your auditors is that you can take their internal control procedures for

granted” (AC5).

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“I think the basic assumption is any one of the Big Four they have got the

skills... the assumption that their audit approach is good and it meets all the

standards,...you are making this assumption, I think it is a valuable

assumption because I cannot go and test it” (AC3).

Analysis further suggests that the AC members are to some extent struggling to

define the right concept because audit quality is not immediately or directly

observable and is difficult to measure. For these reasons, the AC members use

proxies such as the quality of the relationship, auditors‘ reports on the audit and

their discussion of issues to demonstrate they have reasons for being satisfied

about audit quality. Importantly this suggests that the perceptions of the AC

members concerning audit quality are largely influenced by and dependent on the

external auditors themselves, as illustrated by the following AC member:

“What does audit quality mean to you? [Interviewer] It does not have a

meaning, I cannot give you one. One of these papers say there is no

definition of audit quality and I agree with that...If I can say straight away,

the ACs are meant to assess audit quality and the effectiveness of audits. I

think that is not a job that they should be given. The reason is that auditing

is a highly technical skill, no member of an AC is likely to have that skill and

even if they have they will not see the product, which is the audit paper. So

all ACs use proxies and my discussions with external auditors say they all do

the same. So what do they look for, they look for relationships with the

partners in the external firm because that is all they see, you know how well

a paper is presented, do they reach the main issues, are there any

repercussions for the audit and the FRC, and if so, are they important or are

they „nit picking‟, do they highlight issues in advance, do they keep to their

audit programme, all those things they can do directly” (AC10).

Furthermore, evidence from the interview comments suggests that some of the AC

members may not have the technical expertise and knowledge to discharge of their

expected roles effectively (see, for example, Knapp, 1991; DeZoort, 1997; Lee and

Stone, 1997). In consequence, they put reliance on the external auditors for

technical and specific aspects of accounting and business issues because of their

own limitations of knowledge and expertise in those areas. The AC members also

emphasised that their indirect involvement in the day-to-day operation of the

business and consequent information asymmetry requires them to rely on external

auditors to provide an overview about the conduct and activities of corporate

management. Accordingly, the AC members tended to stress the importance of

professional characteristics such as technical knowledge, competence and

experience for high audit quality. As noted above, the knowledge base and process

of the audit is difficult for the AC members to observe. For this reason, the

appearance of professionalism of the auditors also becomes an important construct

of the meaning of audit quality that is influenced by the interaction between the AC

members and the auditors. This is in line with a more general perception that audit

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practitioners tend to promote a professional appearance or behaviours in relation to

their work rather than increasing knowledge of relevant parties that they interact

because of the abstract nature of auditing knowledge (Anderson-Gough et al.,

2002; Carrington, 2010).

“ACs are not the auditors and the ACs are not expert auditors themselves

and they have not been trained as an expert auditors, in addition they

depend on the auditors professional knowledge, for particular technical

aspects. The ACs cannot be expected to be as technically competent as the

auditors themselves. Each party has to understand the role of the other.

Quite frankly if the auditor says something, the AC has to rely on his

knowledge that he is right even though it may be sometimes illogical or hard

to understand” (AC9).

“I came across another nice expression the other day, when somebody

presents to you or when somebody talks to you, you do not actually

remember most what they say what you remember is how they make you

feel, that is quite an important distinction to draw. I do not remember most

of what the audit partner says about the audit I will be quite honest with you

I do not remember most of it, I do not even find a lot of it very interesting

or engaging, I find a lot of it reasonably tedious but I do remember how he

makes me feel. Does he make me feel that things are okay, does he make

me feel that things are on track and does he make me feel that he„s got to

grips with things” (AC11).

The AC members‘ construction of the meaning of audit quality through constructs

such as the characteristics of the audit firm is influenced by their own need to

create a credible image for legitimacy with the external parties (for example,

regulators, shareholders and other stakeholders) in relation to their roles and

responsibilities in monitoring audit quality. The AC members believed that engaging

with a credible audit firm reflects high audit quality that can add an aura of

credibility to their own work. Such ‗image management‘ is especially important as a

source of legitimacy for the AC members and to manage public perceptions

concerning the level of audit quality. Hence, to fulfil the need for legitimacy, the AC

members‘ emphasis the size, industry expertise and reputation of the audit firm to

signal high audit quality.

“First of all I think you want to make sure you are dealing with an audit firm

that has a very strong worldwide reputation. We are working with the Big

Four. There has been a lot of debate recently, which I have participated in,

about whether public companies could use non Big Four auditors to a certain

extent. While I wouldn‟t rule that out, I think I feel a lot more comfortable

with one of the Big Four and that the outside people has more confidence

because they have strong internal control procedures themselves, they have

back up partners who review the work on the audit and so on” (AC5).

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It appears that the perception (of size and quality) exists because it may generate

feelings of comfort and confidence about audit quality not only for the AC but also

the wider public. Additionally, the perception is also influenced by the limited

exposure of the AC to different size audit firms. The AC members perceived that the

non-big four firms are unlikely to be able to deliver the required audit quality. In

contrast to the viewpoint of the above interviewees, however, a small number of

the AC members perceived that there is no real audit quality difference between the

size of the audit firm, but the perception still exists that there is a threat of being

criticised if the AC fails to discharge its roles and responsibility effectively if a non-

big four firm is appointed, as illustrated by the following comment:

“I would expect that the top ten audit firms are all capable of doing a good

job for you, would all be technically competent...I expect that they would be

capable of doing a perfectly acceptable job. Do I think that the bigger plc‟s

are going to go on using the Big Four? I expect they will because they will be

worried about criticism if something went wrong and they had not” (AC11).

Thus, the constructs of audit quality that relate to audit firms‘ characteristics and

the professionalism of the individual auditors can be argued to be connected to the

issue of legitimacy for the AC. This perspective is particularly relevant in the AC

context where legitimacy is linked to engaging high quality external auditors. This

aspect of audit quality is also crucial in managing the impression of others (such as

shareholders) because credible audit is to some extent is important to the AC‘s own

credibility.

The construction of audit quality can also be described as reflecting the AC‘s need

to provide assurance to outsiders, in particular the shareholders, that financial

information provided by management is legitimate. Here, the concept of audit

quality is related to efforts to enhance the legitimacy of the financial reporting

process and at the same time to assist AC members discharge their formal roles,

functions and activities to relevant parties.

“I am one of the people that is responsible for ensuring that when you as an

investor in that company see the company‟s results that those results

represent a fair view of the company‟s performance, that the company is

and will continue to be a going concern and that the results you are seeing,

based on all of the knowledge that is available to us, are likely to be

sustainable. That seems to me to be a very important responsibility.

Secondly it is my job as a member of the board to be confident that the

company has a strategy for the future that is targeted upon increasing value

of the company in the interests of the shareholders and other stakeholders...

the role of the external auditors is to make an effective contribution to the

board being satisfied that its overseeing of those two key things is being

done as well as you possibly can. That is what I think the AC is there for”

(AC11).

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Overall, the above analysis shows that role expectations of the AC and interactions

between the AC and the external auditors can be said to influence and shape the

AC members‘ perceptions of the meaning of audit quality in practice. The next

section provides further evidence about acts and objects that are used as symbols

to communicate and represent meaning of the of audit quality in the process and

operation of the AC.

6.3 Representations of Audit Quality in Practice

This section answers the third research question: to document the different

representations associated with the meanings of audit quality in practice. Analysis

of the interviews evidence shows that various symbols are identified in the

operation of the AC members in order for them to obtain a sense of comfort in the

quality of work performed by the external auditors. In this case, both formal and

informal interaction and communication, namely AC meetings, external audit

reports and external auditors‘ presentation and communication are important acts

and objects in deriving comfort about audit quality (see, for example, Gendron et

al., 2004). The evidence here is consistent with Power (1997) who suggests the

importance of formal audit reports, presentations of auditors in meetings and

informal communications as representations of comfort in the process of

verification. Similar to studies by Gendron et al. (2004; 2006) and Beasley et al.

(2009), the analysis indicates that these various representations are internally

developed, sustained and promoted in the operation of the AC, and serve to make

members comfortable concerning the quality of the work of the external auditors.

The interviews suggest that formal reports that are prepared by the external

auditors become a key object in signifying audit quality in the eyes of the AC. For

example, in the following quotes the AC members signified audit quality through

his/her assessment of the content of the auditors‘ reports. The AC members

explained that the external auditors prepare various written reports at different

stages of the audit. For example, before the first AC meeting, at the beginning of

the audit, the external auditors prepare a detail report that outlines the scope of

the audit including the audit plan, technical accounting issues to be addressed and

the key risk areas that they would be focusing on in the conduct of the audit. The

AC then has the opportunity to read the information prior to the meeting. Here, the

AC members stated that they get comfort about audit quality through examining

the content of the report by ensuring that the auditors identify and concentrate

their work on the right key areas, which means that the audit plan reflects the key

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risk areas of the business. The content of the report also influences the subject of

discussion of certain issues in the AC meetings.

“You do expect a pretty detailed report from them (external auditors) and it

is really about making an assessment of the quality of those reports...The

assessment of the committee as a whole about the quality of the work done

will be based upon the written reports submitted to the board and the verbal

explanation that is given to the committee” (AC11).

“The external audit will present to the AC a report showing the key areas

that the external auditor believe needs to be examined. The key issues in

their mind as they design the external audit procedures - the key accounting

issues, the key system issues, the key concerns that they may have, and

discuss those with the AC in advance of the audit and reach an agreement

on that. It is quite a comprehensive report and would go in advance of the

audit, from the external auditor to the AC. After the completion of the audit,

a very detailed report would go to the AC from the external auditor, setting

out the findings as a result of the audit in relation to the factors that have

been previously reviewed by the AC and discussed with them in advance.

The audit partner or perhaps one of the audit staff will come to the AC and

discuss the findings, in the detailed report with the AC, face to face in the

audit meeting. Of course, all of that would also happen separately with the

management of the company” (AC1).

The AC members have a high interest in risk matters, not least because risks

underlie the external auditors approach in the audit but also they rely on this

subject to develop their own understanding of audit quality. For example, the

reports are used by AC members to develop expectations about the conduct of the

audit. Thus, some sense of comfort about sufficient audit quality would be derived

when the AC members find that the performance of the external auditor is in line

with their expectations. It appears that such reports shape AC members

interpretive schemas by providing them ‗ideal‘ features that the AC members

should be focusing on when assessing audit quality. The finding highlights about

how content of the report is used to operationalise or give meaning to audit quality

for AC members, influencing their focus on the work of the external auditors. This

reinforces the central role the external auditors play in influencing the AC members‘

understanding of audit quality.

“Clearly one of the things that audit committees have to do is to approve at

the beginning of the financial year the audit scope that they (external

auditors) are going to carry out...you would expect them to identify what

they see as the particular risks that year. Therefore, to some extent you are

ensuring they do have a good understanding of what are the particular risks

because of the economic environment. Therefore, it is important to make a

judgement about whether they have identified the right ones and

understood the right ones...Demonstrating they have completed the audit

scope they have said they would complete, reporting back on their findings,

obviously their overall findings but particularly around those key risks”

(AC3).

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“...you hear him (external auditor) talking about risks and you will think he

knows his job and you will feel more comfortable...the auditor has to convey

their views and they have got to do that in a way which is going to

encourage a response. The auditor has to make certain the AC hears it,

understand it and responds to it. So they have to coach and push along...”

(AC8).

It is also evident that reports that are prepared by other parties such as

management, internal auditors and the regulator are an important source of

information for the AC when seeking comfort about the quality of the work of the

external auditors. For example, some of the AC members described how they used

the internal audit report on risk analysis to evaluate whether the external auditors

have incorporated key risks in the audit plan and have examined the right key risk

areas during the conduct of the audit.

“The internal auditors report to me as chairman of the AC so I can get an

independent view from them. So I go into the meeting with a view of the

problem myself and then I find out whether the external auditor has looked

at the same issues and analysed them in a kind of sensible way and I

understand where he is coming from” (AC5).

The report that is prepared at the beginning of the audit also gives them an

opportunity to examine the profile of the audit team members. In particular, the AC

members will examine the experience of the partner and manager who will be

involved in the audit. The interviewees acknowledged that they are using the

information in getting comfort that the audit firm is using the right quality people -

individuals that demonstrate the necessary knowledge and expertise in the

company‘s business as well as having sufficient knowledge of technical accounting

issues.

As shown in the above quote, at the end of the audit, the final report that is

produced by the external auditors will predominantly highlight the key audit

findings. For the AC members, this report is very useful to make certain that the

auditors have carried out the audit according to the scope that has been agreed at

the beginning of the audit. They also want to ensure that the auditors have carried

out sufficient audit work on the key risk areas, which they feel will have an impact

on the quality of the financial reporting and audit quality. In general, reports that

are prepared by the external auditors are considered to be an important working

instrument for the AC members to assess and gain comfort about audit quality.

Analysis of the evidence shows that presentation and communication by auditors in

AC meetings are important symbols that signify meaning for audit quality. The AC

members stated that these symbols are important for them to assess audit quality.

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The majority of the interviewees described the importance of the professional

image: inter-personal and behavioural skills of the external auditors,

communication, responsiveness and body language during the meetings, as

providing a sense of comfort for them on audit quality. This finding is consistent

with the finding of Sarens et al. (2009, p. 15), who found that auditors‘

interpersonal and behavioural skills act as a source of comfort for the AC.

Therefore, an interesting aspect of the AC members‘ approach to the evaluation of

the adequacy of the audit, and by implication their construct of audit quality,

concerns the manner in which the external auditors communicate to the AC and the

auditors‘ presentation during the AC meetings.

“I came across a rather nice expression the other day, when somebody

presents to you or when somebody talks to you, you do not actually

remember what they say so much as how they make you feel, which is quite

an important distinction to draw. I will be quite honest with you I do not

remember most of what the audit partner says about the audit. I do not

even find a lot of it very interesting or engaging, I find a lot of it reasonably

tedious. However, I do remember how he makes me feel. Does he make me

feel that things are okay, does he make me feel that things are on track and

does he make me feel that he has got to grips with things” (AC 11).

“I think it is just as important through their presence at the audit committee

and through dialogue with them to get a sense of how on the ball they are, I

think you want to feel they have got a very clear decision making process

around, you want to feel that that is a good sound process that is also an

efficient and fairly slick process. Frankly, I think most of it is around the

softer stuff rather than the harder stuff, how they conduct themselves, as I

say „are they on the ball‟?” (AC3).

More specifically, the AC members signified audit quality by assessing the extent to

which the external auditors are able to communicate about risks and the company

business to convey an impression of quality: knowledge, expertise and competence

of the external auditors and the conduct of the audit. Thus, ‗risk‘ becomes a

meaningful symbol signifying audit quality which is communicated during

interaction between the AC members and the external auditors. Some of the AC

members also mentioned that in the AC meetings there is considerable discussion

with the auditors in relation to financial reporting issues, such as application of new

accounting standards and their impact on the financial statements.

The informal channel of communication and interaction is also part of the important

act to operate meaning of audit quality whereby the AC members perceived that

continuous discussion plays an important role in building openness and

trustworthiness with the external auditors to give them comfort about audit quality.

The AC members consider this informal process as a strength that helps them to

raise and discuss ‗difficult‘ matters with the external auditors. For example, the AC

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members perceived that private meetings between the AC members and the

external auditors provide a venue for the AC members to ask difficult questions, for

example regarding the cooperation and integrity of the management, or to discuss

sensitive matters or concerns that cannot be done during the formal meetings.

They believed that the external auditors are more willing to express things openly

about various issues during informal discussion. In general, the majority of the AC

members perceived that these informal interactions and contacts were an essential

aspect of the relationship between the AC and the external auditors.

“The key things that you are looking for are openness and

trustworthiness...do you trust them, do you respect their judgement, and

are they capable of having a dialogue with you. So can they discuss a

problem with you or are they very defensive. The less able you are to have a

dialogue with them and the more defensive they are, the less you trust

them...you are assessing situations and people” (AC7).

“In many ways I think the important meetings are the ones I have privately

with the auditors because as a professional accountant I can talk to the

external auditors on an equal basis and I can ask them to be quite frank

with me about how they feel about things and they always are. Whereas in

the committee the external auditors may be a bit more careful in how they

say things. When I have a private meeting with them they just tell me what

they think and that is very important for me to know” (AC5).

In general, the evidence discussed above suggests that a significant aspect of the

AC members‘ approach to audit quality is what may be called ‗relational‘. That is,

their interpretation of the quality of audit delivered in practice is dependent mainly

on symbols (acts, objects and words): their relationship with the auditor, views

about personal qualities, external audit reports, presentations and communications,

rather than by any kind of technical assessment of the quality of the content of the

audit process itself. Accordingly, the meaning of audit quality is signified, created

and communicated through the use of symbols – meetings, auditors‘ presentations

and documents used in interactions between the AC members and the auditors.

6.4 Effects of the Audit Committee on the External Audit

It is also important to consider precisely how the AC impacts upon the work of the

external auditors. Accordingly, the discussion below gives specific to the effects of

the AC on three aspects of auditing: the audit process, auditor appointments and

remuneration, and auditor independence. In practice the AC members‘ impact on

the scope and conduct of the audit is very limited because it is not very easy for the

AC to deal with something that is as technical and specific as an audit and to

influence or change the audit approach. The external auditors‘ audit plan is

considered by the AC at one of its meetings. In that meeting, the AC members

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contribute to the discussion about the scope of the audit, but do not make decisions

with regards to the audit plan and approach. Hence, the audit plan is really

reported and presented to the AC for authorisation or consideration with a minimal

input from the AC. In the AC meetings, questions and discussion tend to be

concerned with risks and business aspects of the audit client rather than the

content of the audit process itself. There have been instances where, after

reviewing the audit plan, the AC has asked the external auditors to do a bit more in

certain areas or to include certain things in its plan. Nonetheless, the level of

questioning and probing into matters is not ‗intense‘. In a typical situation, the AC

would look at the audit plan and ask, ‗are there any matters that you would like to

bring to our attention?‘ to which the external auditors would reply there were no

matters. In this context, the limited role of the AC in specific matters dealing with

auditing and accounting matters may be explained because of their lack of detailed

knowledge and expertise in those areas. However, the lack of critical assessment by

the AC can also be perceived as a consequence of the AC being able to trust and

get comfort from the external auditors on those areas.

“I think they have correctly assessed the risk areas which of course they

have done with management before they come to the AC. Sometimes we

have asked them to give more emphasis to certain areas but we have never

changed their approach and I would regard that as a really bad sign if we

had to...” (AC10).

The AC is not always passive however. There is some evidence of the extent of the

AC members questioning and challenging the auditors‘ work during meetings. For

instance, on a couple of occasions the AC members referred to having asked the

auditors to perform additional work or provide further details in matters of concern

as a result of the AC seeing and reviewing their reports. There is also some

evidence concerning the impact of the AC on the audit process. For example, one of

the AC members mentioned that he sometimes asks the external auditors to

increase the sample size or to adjust the level of materiality being used as a result

of matters of concern to the AC. Nonetheless, overall the AC members mentioned

that changes to the external audit plan as a consequence of AC enquiries are rare

and subject to consideration by the auditors themselves.

“When I sit there with the audit partner, if there are particular concerns that

the audit committee have got in connection with the company...I can raise

those with him and ask him to add those to his procedures or ask him to be

careful in certain areas... we would be saying to the external audit firm, we

are potentially worried about this particular division, could you perhaps

increase your level of testing in that particular business, perhaps increase

your sample sizes, or reduce your materiality levels, each year you agree a

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materiality level with the external audit firm, perhaps you would ask them to

go beyond that” (AC1).

“What happens in this company‟s case is there is a pre audit meeting with

the auditors in which they go through all their plans and those plans are

discussed, and if we feel that there is something deficient in the plans, then

it is the AC‟s job to actually highlight those and discuss them. Maybe they

would not be incorporated in the plan and if there was something the auditor

was doing that we did not feel relevant we would tell him. Nonetheless, at

the end of the day it is the auditors‟ decision” (AC9).

The AC members‘ comments in interview also imply that the AC members have a

rather limited impact on hiring and firing and on setting the remuneration of the

external auditors and regarded this as a matter primarily for the management. For

instance, any dissatisfaction with the work of the auditors that leads to a proposal

for a change of audit partner or audit firm would come from the management but

the AC would generally be involved in the process of tendering. Some of the AC

members described the audit tender process as a ‗beauty parade‘ where a number

of audit firms would come and present to the management and the AC, but

selection of the external auditor is normally subject to considerable influence from

the management.

“Occasionally you will find that they (the management) want to change a

partner, even change a firm, more frequently change a partner in a

subsidiary jurisdiction, occasionally they are dissatisfied with the quality of

the team but all of those come through management and there is no real

way of the AC doing other than accepting that” (AC10).

“We have a tender process which is called a beauty parade. If the

management really believe the auditor is the best person against the other

firms then they (the management) will come to the AC and say we actually

think this firm has the best people ” (AC8).

One of the AC members opined that the role of audit quality in the selection and

appointment of the external auditors by the AC is rather limited because audit

quality is difficult to measure and quality differentiation between audit firms is

unobservable. For this reason, selection of external auditors is normally based upon

observable features such as reputation, industry specialisation and size of the audit

firm. Some of the AC members mentioned that change or selection of audit firm

may not necessarily be based on consideration of audit quality but it may also be

related to the costs of the audit. Most of the AC members acknowledged that the

management is always under pressure to cut down costs including the cost of the

audit. As a result, appointment of the external auditors is very much driven by

considerations such as whether the management think they get value for money

from the external auditors. This may suggest that appointment of the external

auditors is influenced by costs rather than audit quality.

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“I don‟t think ACs are in a good position to judge but I think they could

accept that the Big Four all have very high standards and the difference

between them in terms of standards is not something that they can

measure. If you do a beauty parade although that is theoretically out on the

table it is not something you are going to be able to judge” (AC7).

“I mean here for example we did change auditors probably five or six years

ago. Always one of the concerns of the company is the cost of the audit and

whether you feel you are getting value for money. So things can change

purely on economic issues, nothing to do with the personalities... So the

mere fact of going to tender always reduces fees, not necessarily quality

either” (AC9).

Although the AC members do not make the decision concerning audit fees, they are

particularly concerned that the fees are not significantly reduced by the

management to an extent that would impact on the work of the external auditors or

that put them in a situation of having to ‗cut corners‘. The AC members also expect

to be fully informed about additional work undertaken by the external auditors that

gives rise to additional fees or that create potential sources for disagreement

between the management and the external auditors.

“Most companies are looking at costs much more carefully and they are

seeking to cut costs everywhere, and of course the auditors are rightly

challenged around their costs. From an AC point of view you need to make

sure that the external auditors fees are not being hit so hard that maybe

they would not do as much work as you would like them to do. I think you

have also got to be a little bit careful making sure that the management is

not cutting down too heavily on the audit fees and then the auditors might

think of cutting corners” (AC3).

“The only area where potential disagreement may be would be if additional

problems arise which end up giving rise to additional fees which were not in

the original budget. I think if that happens the audit partner should be

warning the AC chairman as soon as he can see that costs are going to be

higher than they were originally expected to be” (AC1).

Similarly, the AC members are made aware of any non-auditing services provided

by the external auditors. The decision in determining types of non-audit services

and fees are normally decided by the management, but the AC members are

required to give their approval on these matters. Most of the AC members

mentioned that certain types of non-audit services such as valuation of intangible

assets and improvement of accounting systems or any work that would result in the

external auditors ‗verifying‘ their own work should not be performed by the external

auditors. On the other hand, a majority of the AC members expressed the view that

certain services like tax, due diligence reviews and work related to mergers and

acquisitions is not likely to impair the auditor‘s independence. Most of the AC

members mentioned that those types of non-audit services are better provided by

the auditors because of their in-depth knowledge of the business.

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“[If] there is a large non-audit fees involved, the AC has to give its consent

and if it goes over a certain proportion of audit fees they also have to give

their consent. So the monitoring is quite straightforward” (AC10).

The interview evidence also suggests that the management decision to select the

external auditors to perform non-audit services is influenced by cost considerations.

For the management, appointing another firm to perform non-audit services will

normally cost more. As a result of the economic pressure (from the point of view of

client management), the AC is generally willing to accept the management

recommendation to appoint the external auditors to perform the non-audit services

although it may perceived to impair independence.

“By using somebody else it costs you more and you have to educate the

other party, so you can argue that actually it is not effective for the

organisation. That is true, so we pay a higher price but we believe that is

just something that has to be done in order to keep our auditors objective.

Our auditors would not agree with that, they say they will always be

objective and independent, it does not matter how much other business we

give them. For us we just think, well it is much better not to have any doubt

about the objectivity” (AC6).

Overall, the AC interviews provide evidence about the limited effects of the AC on

external audit (see, for example, Turley and Zaman, 2007). The impact of the AC

on the audit process is minimal, but is also limited with respect to auditor

appointment, remuneration and independence. Similar to Spira (1999), this

suggests that with respect to many of these aspects of the system of auditing, the

AC role is largely for ritualistic and ceremonial purposes and in many cases may

lack substantive purpose.


This chapter has provided empirical evidence on the process of making meaning for

audit quality from the perceptions of the AC members. It has provided some

interesting insights into factors that influence the construction of the meaning and

the AC members‘ approach to the evaluation of the adequacy of the audit, and by

implication their constructs of audit quality. As discussed in the theoretical

framework chapter, individual‘s understanding of audit quality is formed through

interaction between various constituents in the auditing environment and influenced

by various environmental factors. Thus, the meaning of audit quality is socially

constructed and has to be created, signified and communicated through various

symbols.

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For the AC members, their perceptions of audit quality are relevant to

understanding the operations and effects of AC in relation to external audit. It is

notable that AC members‘ construction of meaning concerning the concept of audit

quality involved significant reference to aspects of their relationship with the auditor

and to whether or not they feel comfortable about the audit quality that is delivered

in practice. While it may be appropriate that AC members look for evidence of

personal and professional qualities in the auditor, there could also be a concern that

this opens up an ‗image management‘ aspect to audit quality in practice. It should

also be noted that the study identifies the struggle of the AC members in defining

the term of audit quality, which has contributed to the minimal impact of the AC

members on external auditing. From the process of constructing meaning of the

audit quality discussed in the chapter, it can be seen that the AC members have

difficulties in defining the concept of audit quality because it is difficult to measure

and observe, and the AC members may not have sufficient knowledge and

expertise to handle something that is specific and technical like auditing. Rather

than having their own clear point of reference of what audit quality is based on, the

AC members are taking some of the concept of audit quality from the external

auditors themselves as a frame of reference. An example of this is the influence of

the auditors‘ reports, and their presentation and communication concerning risks

which become an important source of discourse concerning audit quality for the AC

members. The external auditors help to bring about a ‗schema‘ of audit quality for

the AC members. Thus, AC members are depending on external auditors for their

understanding of audit quality and their conception of its meaning is very much

influenced by the external auditors themselves.

Similarly, the indirect nature of the AC‘s observations of audit quality have caused

AC members to rely on ‗proxies‘ of audit quality involving a combination of

measures linked to audit inputs and outcomes related to audit quality, such as

characteristics of the audit firm, professionalism of the external auditors and the

quality of the financial statements in defining meaning of audit quality. The AC

members identified the quality of the financial statements, which are the output of

the financial reporting process, as a construct of audit quality rather than a

technical interpretation of the quality of the audit process. Likewise, perceptions of

the AC members about the meaning of audit quality is associated with the ‗input‘

factors such as characteristics of the audit firm (size, industry specialisation and

reputation) and professionalism of individual auditors (characteristics, values and

appearance) that indicate high audit quality.

169

Analysis of the ‗input‘ factors from the interviews evidence also provides some

interesting insights into the perceptions of the AC members concerning the

meaning of audit quality. For example, professional appearance: the interpersonal

and behavioural skills of the external auditors during interactions are significant for

the AC members in constructing meanings of audit quality in practice. The findings

show that the presentation of the external auditor during interaction and

communication with the AC members become an important means for assessing

audit quality and are important for the AC members to derive comfort about audit

quality. The findings suggest that the perceptions of the AC members concerning

audit quality go beyond the technical skills of the auditors, thus, suggesting that

relational rather than technical aspects of external auditors are more important in

influencing the perception of AC members about audit quality.

This study suggests that the various constructs of audit quality are important for

the AC members to show that they are having an acceptable basis for concluding

there is appropriate audit quality, which is important for their legitimacy. Internally,

the AC members legitimise their roles and responsibilities by reviewing of external

audit reports and asking questions, and assessing the external auditors‘ responses

during the formal and informal meetings. Externally, the AC members legitimise

their roles and responsibilities through engaging with a reputable and specialist

audit firm that has individuals with the ‗right‘ quality and possess the required skills

and knowledge to indicate high audit quality.

This study also provides some interesting evidence on AC effects. The interview

evidence shows that the AC has a rather limited influence on the work of the

external auditors, in particular the external audit process. The evidence provides

limited support concerning the effects of the AC on the content or conduct of an

audit. The role of the AC is often restricted to the approval of scope of the audit.

Similarly, the formal responsibilities of the AC members in auditor appointment and

remuneration, and provision of non-audit services (auditor independence) are

rather minimal and often restricted to the approval without much enquiry. This

evidence suggests that the role of the AC members is rather for ceremonial

purposes and casts doubt about the effectiveness of the AC in monitoring quality of

the external audit.

In conclusion, this chapter shows that (i) the perceptions of the AC members

concerning audit quality are influenced by societal and regulatory factors, such as

the expected roles and responsibilities of the AC in the corporate governance

arrangements, (ii) the AC members‘ conceptions of meaning of audit quality is

170

influenced by the external auditors, (iii) assessment and comfort about the quality

of work of the external auditors is substantially influenced by the interpersonal and

behavioural skills of the external auditors during interactions and communications

with the AC, and (iv) the roles of the AC in relation to external audit are rather a

ceremonial feature where the impact of the AC to external audit is minimal.

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Chapter 7

Quality Inspectors’ Perceptions Concerning Audit Quality in Practice

7.0 Introduction

The purpose of this chapter is to set out the results of the questionnaire survey that

was conducted with quality inspectors to elicit their views concerning the meaning

and standing of audit quality, and the influence of external and internal factors in

the auditing on that meaning The structure and analysis of the questionnaire survey

were described earlier in the thesis (see Section 3.3.1.3). The results of the

interviews that were conducted with two representatives from quality inspections

and public reports published by the AIU were also used to gain further insight into

this study and amplify the questionnaire survey findings.

The views of the quality inspectors concerning audit quality are potentially

important for three reasons. First, their views may provide some indication about

how good or bad auditing is in practice because the quality inspectors have the

opportunity to assess and form judgement on external auditors‘ performance

through records of the audit that is not available to any other group other than the

auditors themselves. Second, an interview and questionnaire survey may provide

evidence about quality inspectors‘ conception of meaning of audit quality and their

perceptions on the potential impact of internal and environmental factors on the

quality of work on individual audit assignments and their conception of the meaning

of audit quality in general. Finally, the quality inspectors are a corporate safeguard

as they monitor the external audit and publish their judgement based on their

assessment; their opinions may influence the practices implemented and quality

achieved within the audit firm.

It is important to note that due to the limit of the sample in this study, analysis of

results is primarily descriptive in nature, and discussion of the results has to be

impressionistic. In consequence, a caveat should be stated about the interpretation

of the evidence from inspectors. When there is a strong consensus from the twelve

responses, it is indicative of a widely held opinion but when there are variations,

there are limits to the strength of conclusions that can be drawn. The sample is

relatively small and does not allow for further statistical analysis, such as testing for

differences within the sample (such as experience in practice, educational

qualifications, etc.). It is also important to note that the study does not aim to test

172

any hypothesis or examine cause and effect. Nonetheless, within these limits, this

study is interesting and relevant to look at because it provides some evidence of

audit quality inspection, a part of the overall audit system that is not easy to

penetrate and which has not been extensively covered in prior research.

The chapter is structured as follows. Section 7.1 presents a descriptive profile of

the quality inspectors participating in the questionnaire survey study. Section 7.2

describes the attributes quality inspectors associate with audit quality in practice,

which addresses research question 1. Section 7.3 addresses research question 2

that primarily concerns the perceptions of the quality inspectors on environmental

factors that influence the concepts of audit quality in practice. This section also

discusses the internal factors that influence the quality attained on individual audit

engagements. Section 7.4 presents some evidence that highlights the existence of

quality problems in practice. The final section, 7.5, provides a summary discussion

of the findings and concludes the chapter.

7.1 Profile of Quality Inspectors

This section provides details on the characteristics of the respondents surveyed. All

respondents were asked questions about gender, age, educational and professional

qualifications, job title and experience. Tables 7.1, 7.2, 7.3, 7.4 and 7.5 present the

frequency results for these questions. A small majority of the respondents (58%)

are male. As shown in Table 7.2, 33%, 33% and 25% of respondents are aged

between 28-37 years, 38-47 years and 48-57 years, respectively, whereas only one

of the respondents is aged more than 57 years (9%). Most respondents in the

sample have as their highest education level achieved a first university degree

(75%) and 25% have a master‘s degree. All the respondents (100%) have a

professional qualification.

Table 7.1: Gender of Quality Inspectors

Gender Number

Male 7

Female 5

Total 12

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Table 7.2: Age of Quality Inspectors

Age Number

18 – 27 -

28 – 37 4

38 – 47 4

48 – 57 3

Above 57 1

Total 12

Table 7.3: Educational Level and Professional Qualification of Quality

Inspectors

Educational Level Number

Bachelor degree 9

Master degree 3

Doctoral degree -

Others -

Total 12

Professional Qualification Number

ICAEW 12

ICAS -

ACCA -

Others -

Total 12

As for job title, the largest group of the respondents described themselves as

members of the inspection team. The rest of the respondents are either leaders

(25%) or both leader and member (25%) of inspection teams. According to Table

7.5, 17%, 33% and 17% of the respondents have auditing experience of between

5-10 years, 11-15 years, and 16-20 years, respectively, whereas 33% have

auditing experience of more than 20 years. Five of the twelve respondents (42%)

have more than 5 years experience in audit inspection, while 33% and 25% have

3-5 years and less than 3 years experience in inspection respectively. In interview,

one of the interviewees described the knowledge and experience of quality

inspectors as follows:

“They (quality inspectors) have all conducted audits of a similar complexity

to those audit engagements that we are asking them to review...we are

using good people and experienced people....I would say that our top person

is the equivalent of the top person auditing Barclays Bank; I am sure from a

technical point of view” (R1).

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Table 7.4: Position of Quality Inspectors

Current position Number

Leader of inspection team 3

Member of inspection team 6

Both leader and member of inspection

teams

3

Total 12

Table 7.5: Working Experience of Quality Inspectors

Auditing Experience Number

Less than 5 years -

5 to 10 years 2

11 to 15 years 4

16 to 20 years 2

More than 20 years 4

None -

Total 12

Experience in the Audit Inspection Number

Less than 3 years 3

3 to 5 years 4

More than 5 years 5

Total 12

Respondents were asked about the types of audit firm and types of audit

engagement they had inspected in the previous twelve months. Tables 7.6 and 7.7

show the frequency for responses to these questions. About 67% of respondents

claimed that they spent more than fifty percent of their time reviewing the Big Four

firms in the last year of inspection. As for the proportion of time spent on the type

of audit engagement, 92% of respondents spent less than fifty percent on FTSE 100

companies. About equal time was spent by the respondents on other listed

companies. The respondents spent less than fifty percent of their time on inspecting

other public interest entities.

Table 7.6: Proportion of Time in Different Types of Audit Firms

Type of audit firm Number Percentage

Big four firms:

More than fifty percent

Less than fifty percent

8

4

67%

33%

Total 12 100%

Other firms:



2

10

17%

83%

Total 12 100%

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Table 7.7: Proportion of Time in Different Types of Audit Engagement

Type of audit engagement Number Percentage

FTSE 100 companies:



1

11

8%

92%

Total 12 100%

Other listed entities:



5

7

42%

58%

Total 12 100%

Other public interest entities:



-

12

-

100%

Total 12 100%

This section has presented a detailed profile of the personal backgrounds of the

respondents to the questionnaire. In general, it shows that the respondents are

generally experienced in the current positions, are educated and have considerable

knowledge about auditing and experience of a range of inspection assignments both

leading and participating in those inspections. Overall, it is felt this profile

represents a representative group from which to gather evidence of audit quality as

viewed within the inspection system


In this section, an analysis of the inspectors‘ views on the meaning of audit quality

is presented. In other words, this section aims to understand attributes that the

respondents are using in forming their judgements in assessing audit quality in the

inspection engagements they undertake. Table 7.8 shows the rank (out of 22),

mean and standard deviation for each attribute listed in the survey instrument.

Overall, the majority, or fifteen of the attributes are rated above 4, which implies

the importance of the attributes to reflect audit quality in practice.

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Table 7.8: Attributes of Audit Quality in Practice

Id Attribute Rank Mean Standard

deviation

1 The auditor demonstrates an appropriate level of

challenge to the management of the audit client

1= 4.92 0.39

2 The auditor does sufficient work to obtain

sufficient evidence to support an audit opinion

1= 4.92 0.39

3 The work done in carrying out the audit is

subject to review before the audit is completed

3 4.75 0.96

4 The auditor reports the correct audit opinion on

the financial statements

4= 4.67 1.11

5 The auditor is technically competent 4= 4.67 1.13

6 The auditor is independent 4= 4.67 1.13

7 The audit is carried out in accordance with

ethical standards

7 4.58 1.24

8 The audit work undertaken is based primarily on

an assessment of the risks associated with the

client‘s financial statements

8 4.50 1.28


auditing standards

9= 4.42 1.24

10 The role of the audit partner is at the centre of

the audit process

9= 4.42 1.24

11 The audit work is determined through an

appropriate planning process

11= 4.25 1.41

12 The auditor maintains effective communication

and interaction with the audit committee

11= 4.25 1.11

13 The audit meets the quality standards applied

internally by the audit firm

13= 4.17 0.92

14 The auditor maintains a high level of

documentation in the completed audit files

13= 4.17 1.26


quality control standards (ISQC1)

15 4.08 1.32

16 The audit is valued by the audit client 16 3.67 1.13

17 The audit is completed in a timely manner 17 3.58 1.23

18 The auditor maintains a good relationship with

the management of the audit client

18 3.17 1.65

19 The audit firm is free from negative findings in

inspection reports

19 3.08 2.39

20 The auditor satisfies the audit client‘s

expectations

20 3.00 2.56

21 The auditor provides good value for money to

the audit client

21 2.33 1.34

22 The audit firm provides additional services in

association with the audit

22 1.42 1.24

Notes to table:

1. Factors are shown in decreasing order

2. Response scale is: 1. Little or no importance, 2. Unimportant, 3. Undecided,

4. Important, 5. Very important

3. High consensus (standard deviation ≤ 0.85 shown in bold) low consensus

(standard deviation ≥1.25 shown in italics)

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There is a strong consensus among the respondents that high audit quality should

be reflected through adequate challenge to the management (mean 4.92), which is

connected to sufficient audit work that supports the audit opinion or judgement

formed by the external auditors (mean 4.92). The respondents also connected

adequate documentation in the completed audit files to the attributes of audit

quality (mean 4.17), which was also mentioned as a key feature of by the audit

partners interviewed in the study. The AIU emphasises the importance of challenge,

adequate audit work and documentation for the auditors to support auditors‘

judgement to form ‗correct audit opinion‘ (mean 4.67) as key attributes of audit

quality, as stated in its public report:

“The AIU‟s review of individual audits place emphasis on the appropriateness

of significant audit judgements exercised in reaching the audit opinion, as

well as the sufficiency and appropriateness of the evidence obtained. The

AIU‟s inspections include, but are not restricted to, an assessment of

compliance with the requirements of relevant standards and other aspects of

the regulatory framework for auditing” (AIU, 2008, p. 4).

The survey results show that the respondents see a strong link between audit

quality and compliance with the ethical standards (mean 4.58), auditing standards

(mean 4.42) and quality control standards (mean 4.08). The respondents also

expressed strong support for the influence of internal standards within the audit

firm and audit quality. For example, they perceived that ‗the work done in carrying

out the audit is subject to review before the audit is completed‘ (mean 4.75) and

‗the audit meets the quality standards applied internally by the audit firm‘ (mean

4.17) as evidence of a high audit quality.

In like manner, all of the audit partners interviewed in the study associated the

meaning of audit quality with meeting requirements of standards and guidelines in

content and conduct of an audit as well as how quality control is applied within firm.

This is in line with the focus of the assessment carried out by the AIU on firms‘

compliance with the regulatory framework for auditing, and application of policies

and procedures within audit firms to attain a high audit quality. As stated in the AIU

Public Report (2010, Appendix A):

“The AIU monitor firms‟ compliance with the regulatory framework for

auditing, including the Auditing Standards, Ethical Standards and Quality

Control Standards...The AIU‟s inspections of the major firms comprise a

review of the firms‟ policies and procedures supporting audit quality...”

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Frequently, during the interviews, the interviewees argued that although their focus

in the assessment of audit quality includes auditors‘ compliance with audit

regulation, their focus of assessment is more to do with the issue of the ‗quality of

the challenge‘ of the auditors to the management. For example:

“The auditor has to make judgments and the inspection teams make an

assessment of whether those judgments were done in an appropriate

fashion...whether they do sufficient in order to get sufficient reliable

evidence...whether they robustly challenge the management...our criticism

on quality will be on that challenge and not on did they actually follow the

standards” (R1).

“...the fact that we were given a responsibility for monitoring audit quality

but nobody had told us what audit quality was. Therefore, we had to make

an interpretation. The reality is that it is not only compliance with the audit

regulations. To me, if it was merely compliance then all of the criticisms

towards audit regulators would be valid because it then just becomes a tick

box approach, but it is not only compliance with the audit regulations, which

then brings in all the auditing standards and all the ethical standards...the

auditor has to make judgments and we challenge the judgments...” (R1)

As implied in the above quotation, one of the interviewees argued that some claims

about compliance or the ‗tick box approach‘ to audit quality in the inspection

process are unsubstantiated because that is not the only focus of the inspection

unit. In other words, the interviewees suggest that the auditors‘ work performance

in accordance with the standards is acceptable but that it is not sufficient in itself

for audit quality. This may refer to possible inherent limitations of standards to

equate entirely or codify completely what is necessary to form an opinion on the

truth and fairness of the financial statements. It is possible that the criteria

necessary to guarantee that the auditors do enough to form a suitable opinion at an

appropriate level of assurance on the true and fair view would never be captured

entirely by the procedures specified in a codified set of standards.

The questionnaire respondents perceived both the auditor‘s technical competence,

in terms of a high level of auditing and accounting knowledge, and objectivity as

important for delivering high audit quality. The analysis in Table 7.8 shows the

importance of attributes including the auditor‘s competence (mean 4.67) and

independence (mean 4.67) to audit quality (DeAngelo, 1981b; Knapp, 1991). This

is also consistent with the views was expressed by the audit partners and AC

members interviewed in the study on the relative importance of these attributes for

construction of the meaning of audit quality in practice.

179

The questionnaire evidence also shows the respondents rated ‗the auditor maintains

effective communication and interaction with the AC‘ (mean 4.25) to be an

important attribute of audit quality. The AC now has a primary role in

communication between the company and the auditor and considerable emphasis is

now placed on such communication (Turley, 2008, p. 218). As stated by the AIU in

its first public report with regard to the importance of this attribute:

“The auditors' communications with those responsible for overseeing the

entity's financial reporting process (normally an Audit Committee reporting

to the full Board) is a key aspect of the audit process. A quality audit

involves appropriate and complete reporting by the auditors which enables

the Audit Committee and Board to properly discharge their responsibilities”

(AIU, 2004/2005, p. 7).

The respondents expressed lower levels of agreement (a mean score of less than 4)

with statements concerning seven possible attributes for audit quality that are

mainly related to ‗service quality‘ or attributes that relate to aspects of the auditor-

auditee relationship. For example, the quality inspectors rated low ‗the auditor

provides good value for money to the audit client‘ (mean 2.33) and ‗the audit firm

provides additional services in association with the audit‘ (mean 1.42). This

suggests less weight is given by the quality inspectors to the commercial aspects of

auditing as a reflection of high audit quality. This is in significant contrast with the

views of audit partners (as discussed in chapter 5) which suggested that their

conception of audit quality is highly related to the construct of service quality.

To summarise, the responses of the quality inspectors to the survey questions show

that they consider the aspect of what might be called ‗the performance of the audit

process‘ as the key construct of audit quality. The quality inspectors also considered

compliance and technical attributes rather than service attributes as relevant

concepts of audit quality in practice.

7.3 Factors Influencing Audit Quality in Practice

In this section, an analysis of the respondents‘ views on the influence of

environmental factors on the development of the concept of audit quality is

presented. This section also provides analysis of the internal factors within firms

that the respondents perceived as influencing the quality of a specific audit

assignment.

Respondents were asked to answer questions regarding the impact of the business,

accounting and auditing environment on audit quality. Table 7.9 shows the rank

(out of 15), mean and standard deviation for each factor listed on the research

180

instrument. It is interesting to note that four of the higher ranked issues are related

to factors on the business of auditing or the commercial side of auditing. The

consensus amongst the inspectors is that competition in the audit market has had

an impact on audit effort regarding: meeting expectations of the audit client (mean

4.00), delivering value for money (mean 4.00), the auditor-auditee relationship

(mean 3.83) and providing value added services (3.67). Although these factors are

not considered by the respondents as key attributes of audit quality as such, that is

what the auditors should be focusing on to achieve quality (as discussed in section

7.2), the respondents seem to acknowledge the effect of economic pressures in the

audit environment for the auditor to give attention to them in practice. In other

words, the aspects of service quality that the quality inspectors consider are least

important to the concept of audit quality are also exerting significant influence on

conception of audit quality in practice. This position is supported by some of the

respondents who believed that the approach and conduct of the audit in practice

manifests the commercial aspects of the audit firms (see Table 7.10), as there is a

greater need for the audit firms to focus on aspects of service quality to their audit

clients because of intense competition, fee pressure and slow growth in the audit

environment (Behn et al., 1997; Duff, 2004). One of the interviewees commented:

“...firms are under increasing fee pressure from their clients who want to

reduce costs and the recession is effecting the firms...fewer clients, fewer transactions and that is potentially an issue” (R2).

The influence of economic pressures to the conception of audit quality in practice

was also recognized by the audit partners interviewed in the study. The views

expressed by both groups denote the way in which commercial pressures influence

what the auditors do to demonstrate good auditing in practice. In consequence, it

places pressure on what might be seen as the more public interest oriented role of

the audit.

The respondents also rated as high the impact on audit quality of some aspects of

the regulation of accounting and auditing factors. This emphasis is also supported

by the fact that when asked about what general factor is most reflected in the

conduct of audits the item highest ranked by the inspectors was the compliance

aspects of the audit (see Table 7.10). For example (see table 7.9), it is notable that

the most highly ranked factor influencing quality is the complexities of accounting

standards on the technical expertise required of auditors (mean 4.08). The analysis

also shows the agreement of the respondents concerning the impact of audit

regulation on auditor independence (mean 4.00), audit documentation (mean 3.75)

and the audit process (mean 3.75).

181

Table 7.9: Perceptions of the Impact of Business, Accounting and Auditing

Factors Affecting Audit Quality in Practice

Id Factor Rank Mean Standard

deviation

1 Accounting standards requiring more estimation

and judgements have resulted in greater need for

technical expertise

1 4.08 1.48

2 Competition in the audit market has resulted in a

greater focus on meeting client‘s expectations

2= 4.00 1.28

3 Competition in the audit market has resulted in

greater emphasis being placed on delivering good

value for money to the audit client

2= 4.00 0.43

4 The framework of audit regulation has led to

greater attention to factors related to the auditor‘s

independence from the audit client

4 3.92 1.66


greater emphasis being placed on the auditor‘s

relationship with the audit client‘s management

5 3.83 0.92


greater attention being given to delivering value

added services to the audit client

6= 3.75 1.11

7 Changes in the framework of audit regulation

have led to increased emphasis on maintaining

adequate audit documentation

6= 3.75 1.42

8 Factors in the auditing environment have resulted

in greater reliance on consultation within the firm

as part of the audit process

6= 3.75 1.57

9 The current business environment has resulted in

greater reliance on risk based audit approaches

9 3.67 1.14

10 Changes in the framework of audit regulation

have created a greater need for the auditor to

demonstrate a challenge to client management

10 3.33 2.07

11 The current business environment has resulted in

greater attention to audit planning

11 3.00 1.48

12 Factors in the auditing environment have resulted

in extensive internal review of the audit

engagements

12 2.92 2.33

13 The auditing standards are used by audit

practitioners to justify doing less detailed audit

work

13 2.83 1.83

14 The framework of audit regulation has led to

increased focus on conducting an audit beyond

the minimum requirements of auditing standards

14 2.75 1.57

15 The framework of audit regulation has resulted in

less reliance on the auditor‘s professional

judgement

15 2.17 1.48

Notes to table:


2. Response scale is: 1. Strongly disagree, 2. Disagree, 3. Neutral, 4. Agree, 5.

Strongly agree



182

This view about the important influence of compliance aspects to the concept of

audit quality applied in practice was also evident in the interviews with the audit

partners in this study. For example, as reported in Chapter 5, the interview

evidence pointed to the importance of the quality of documentation, internal quality

control applied within the firm to satisfy inspection and the assessment of audit

quality carried out by the AIU.

Table 7.10: Rank Items Influence on the Conduct of Audits in

Practice

Item Rank of

order

Number

(n=12)

Percentage

The approach to the conduct of audits in

practice reflects the compliance obligations

placed on the public accounting firm

1 5 42%


practice reflects the commercial values of the

public accounting firm

2 4 33%


practice reflects the professional values of the

public accounting firm

3 3 25%

In the discussions with inspectors about potential influence of the AIU on audit

quality, the interviewees indicated that they see some positive impact from

independent inspection on the quality of audit performance or on important

attributes that they believe represent audit quality: challenge, evidence and

documentation. This perception is illustrated by the following comments:

“What we do see is that when we go back and review an audit that we had

previously reviewed the firm has addressed the points and it does not matter

how challenging they were of the findings they do actually implement the

recommendations we make...the firms are doing a better job and they are

documenting their rationale or they are putting together their evidence in a

better way and then they are more challenging and thinking historically.

Therefore, I am pretty certain that we are doing better audits than we did 5

years ago” (R1).

“We get feedback from people who say that inspection has made a difference

to the way the audit firms‟ work. I have had that feedback quite frequently

that is rather sort of second hand or third hand from ex-partners of large

audit firms or people working in companies. There is an example of where the

auditors have been more robust because the auditors have used us as an

excuse for not agreeing to things they did not want to agree with in the first

place. For example, “we could not possibly agree to this, you must realise

that nowadays our files are crawled over by the AIU and this is not an

accounting treatment that I could countenance going along with” (R2).

The AIU has also acknowledged in its public report the impact of inspections on

actions taken by the audit firms: ‗firms respond in a positive manner to its

inspection findings by altering their policies and procedures supporting audit quality

183

or providing training to staff‘ (AIU, 2009, p. 10). This shows some evidence of a

positive impact by the AIU with regards to behavioural changes that it wishes to

promote. Nonetheless, concerns have also been raised over the high level of

recurring issues found in inspections (ibid). This issue is demonstrated by the lower

level of support the respondents offered for the suggestion that audit regulation has

led to an emphasis on going beyond the minimum requirements of standards or

(mean 2.75) that environmental factors have led to extensive internal review

(mean 2.92). The behavioural changes may be attributed to a reaction to the threat

of the inspection rather than the actuality in practice. The interviewees explained

some possible reasons for that:

“I want to do things to make sure I do not get a bad report from inspection”.

Auditors are probably doing it for a number of different reasons, the outcome

of our inspection of their particular engagement does have an impact on their

remuneration therefore “I am going to do that to make sure I do not get

criticised”. Equally, if they are criticised to a certain degree, particularly now

the letters go to the audit committee chair on our findings on individual

engagement. “I might lose the job if the inspectors actually criticise me for

something” (R1).

“...audit firms tell us we are making a difference, well they might say that

anyway because they fear that maybe something worse is coming along”

(R2).

From the analysis of the survey questionnaires, the respondents do not indicate

that they see evidence of potential negative impacts from regulation on the

development and approach of firms and auditors to audit quality. For example, the

respondents tended to disagree (rating below 3) with the statements that: ‗the

auditing standards are used by audit practitioners to justify doing less detailed

audit work‘ (mean 2.83) and ‗the framework of audit regulation has resulted in less

reliance on the auditor‘s professional judgement‘ (mean 2.17). This is in notable

contrast with the audit partners interviewed in this study, who often drew attention

to potential negative impacts of regulation on the quality of audit performance. For

example, the audit partners frequently mentioned concerns with regard to changes

in the nature of audit practice to a compliance or ‗tick box‘ audit approach that

undermines their professional judgement.

Overall, there is general agreement among the quality inspectors that the

regulatory factors (both accounting and auditing) and the business aspects of

auditing have an influence on the development and approach of firms and auditors

with respect to audit quality. In particular, the impact of the economic factors, that

is competition in the audit market, on the concept of audit quality in practice

appears to be particularly strong.

184

Respondents were asked to answer some questions regarding their perceptions

concerning how a large number of more specific behavioural, technical or relational

steps affect the ‗actual‘ audit quality that is achieved on individual audit

engagements in practice. The results are summarised in Table 7.11.

Table 7.11: Internal Factors Affecting Audit Quality in Practice


deviation

1 The degree of involvement of the audit

engagement partner during audit planning

influences the quality of the resulting audit

process

1= 4.42 1.30

2 Technical and other consultations within the audit

firm enhance the quality of judgements made

during the completion of the audit

1= 4.42 1.30

3 Technical and other consultations within the firm

during planning influence the quality of the

resulting audit process

3= 4.25 1.11

4 Training within the audit firm enhances auditors‘

technical expertise

3= 4.25 0.96

5 Internal reviews within the audit firm enhance

compliance with the technical requirements of

auditing standards

5= 4.17 1.26

6 Effective communication from the auditor to client

management influences the quality of the


5= 4.17 0.71

7 Interaction between the auditor and client

management influences the quality of the


5= 4.17 0.71

8 Training within the audit firm enhances the

delivery of an effective and efficient audit

5= 4.17 0.92

9 Audit software facilitates compliance with the

technical requirements of auditing standards

9= 4.00 0.43

10 Risk based audit approaches facilitate the

achievement of an effective and efficient audit

9= 4.00 0.43

11 Audit software promotes compliance with

documentation requirements

11= 3.92 0.71

12 Internal reviews within the audit firm improve

compliance with documentation requirements

11= 3.92 0.68

13 Audit software facilitates the achievement of an

effective and efficient audit

13= 3.83 0.84

14 Internal reviews within the audit firm enhance the

quality of audit judgements made during the audit

13= 3.83 0.92

15 Internal reviews within the audit firm ensure the


15 3.75 1.23

16 Training within the audit firm improves auditors‘

ability to challenge the management of audit

clients

16 3.58 1.24

17 Internal reviews within the audit firm enhance

auditor‘s technical expertise

17= 3.50 1.75

185

Table 7.11: Internal Factors Affecting Audit Quality in Practice (continued)


deviation

18 Audit firm methodologies and manuals improve

the quality of audit judgement applied during the

audit

17= 3.50 1.28

19 Interaction between the auditor and the audit

committee is influential in determining the content

of audit work undertaken

19 3.42 1.41

20 Risk based audit approaches help the auditor to

provide value for money to the client

20 3.25 1.41

21 Audit firm methodologies and manuals enhance

the auditor‘s ability to challenge client

management

21 3.08 1.32

22 Internal reviews within the audit firm ensure the

auditor‘s independence from the audit client

22 3.00 1.71

23 Risk based audit approaches help the auditor to

provide value added services to the audit client

23 2.92 1.48

24 Performance appraisal systems within audit firms

increase compliance with the technical

requirements of auditing standards

24= 2.83 1.65

25 Performance appraisal systems within audit firms

improve compliance with documentation

requirements

24= 2.83 1.82

26 Interaction between the auditor and the audit

committee facilitates the correct audit opinion

being reported

24= 2.83 1.43

27 Performance appraisal systems within the audit

firm enhance the auditor‘s technical expertise

27 2.67 1.34

28 Performance appraisal systems within the audit

firm improve the auditor‘s independence

28 2.58 1.41

Notes to table:


2. Response scale is: 1. Strongly disagree, 2. Disagree, 3. Neutral, 4. Agree, 5.

Strongly agree



The questions that are the basis for Table 7.11 were intended to provide an

understanding of quality inspectors‘ view about what differences they see in the

specific practices and behaviours adopted between the audits they inspect that they

perceive have an influence on the relative quality of those audits. Some of the

items refer to things that may vary from audit to audit, even with the same audit

firm or team, such as the degree of involvement of the audit partner, and others to

things that may vary between firms, such as the nature of appraisal systems.

186

Overall, 18 of the 28 statements in the questionnaire were supported by the overall

responses (mean score above 3.5) and suggesting that these factors were

perceived by the respondents as having at least an effect on audit quality. The

respondents perceived the role of the audit partner in the audit planning as having

an important influence on the audit process (mean 4.42). The involvement of

relevant staff within the firm through consultation etc. was also identified as

influencing on the quality of audit judgements (mean 4.42) and, subsequently, the

resulting audit process (mean 4.25). The respondents also strongly agreed with the

influence of training, as they perceived the positive impact of training on the

technical competency of the external auditors (mean 4.25) and the delivery of an

effective and efficient audit (mean 4.17). This finding is echoed in the following

comment by one of the interviewees:

“The people aspect is a significant concern, so there is quite a focus looking at

the human resource systems and performance appraisals...the overall firm‟s

approach to training and whether the firm is in compliance with continuing

professional development...” (R1).

The factor related to internal audit firm monitoring and micro-quality control, that is

the firm‘s quality review system, is also perceived as being influential in the

conduct of an audit: for instance the statement that ‗internal reviews within the

audit firm enhance compliance with the technical requirements of auditing

standards‘ was given considerable support by the respondents (mean 4.17). These

factors (of planning, consultation, training and quality control) that have been

highlighted above were also referred to as an important representations of audit

quality by the audit partners interviewed in this study (see section 5.3).

Audit firm monitoring and micro-quality control are also perceived as influential

concerning various aspects of the audit performance by the respondents. For

example, the respondents perceived that internal reviews improve compliance with

the documentation standards (mean 3.92), enhance the quality of audit

judgements (mean 3.83), ensure delivery effectiveness and an efficient audit

(mean 3.75), and enhance the auditor‘s technical expertise (mean 3.50).

Nonetheless, interview evidence highlights some concern about the effectiveness of

the firms‘ quality reviews on achievement of high audit quality, as pointed out by

one of the interviewees:

“As regards to sort of comparisons of the way we are looking at quality and

the way the firms are looking at quality. What the firms have generally done

is they have designed audit systems to be compliant with auditing standards

and then in doing their own annual quality review. What they have done is

just said “has the firm‟s system been complied with” because if the firm‟s

187

system has been complied with de facto this audit must comply with

auditing standards because our system complies with auditing standards. So

the amount of time they spend on doing a file review is very limited and is

focused on whether all the requirements have been met and have things

been completed in accordance with our system and does not drive down into

did the work that the staff actually do meet the objectives of the particular

audit test?...there is an issue as to whether the firm‟s own quality reviews are sufficiently rigorous” (R2).

The respondents also recognised the impact of effective communication and

interaction (both mean 4.17) between the external auditors and the client

management on the quality of the resulting audit process. Consistent with other

perception studies (Schroeder et al., 1986; Chen et al., 2001), this finding

highlights the important role of the audit client in facilitating the achievement of an

audit. Interestingly, although the respondents perceived effective communication

and interaction between auditors and the AC as one of the key attributes of audit

quality (as mentioned in section 7.2), the analysis of the responses shows low

evidence of the actuality concerning the role of the AC in the achievement of audit

quality in practice. For example, the respondents gave relatively limited support for

the statements that ‗interaction between the auditor and the audit committee is

influential in determining the content of audit work undertaken‘ (mean 3.42) and

‗interaction between the auditor and the audit committee facilitates the correct

audit opinion being reported‘ (mean 2.83). These views suggest only a slight effect

of the role of the AC on the actual conduct of the audit whereas consistently a

range of issues related to reporting and communication with AC are highlighted in

the inspection reports (AIU, 2008; 2009; 2010). Overall, the findings suggest a

minimal impact of the AC on the audit process, which is in line with the finding of

Cohen et al. (2002) and Turley and Zaman (2007) who suggested that the AC has a

weak influence on the audit process. In like manner, some of the audit partners

interviewed in this study expressed views regarding the minimal impact of the AC

on the content and conduct of the audit and achievement of high audit quality in

practice. The analysis of the interview evidence collected from AC members, which

was discussed in Chapter 6, also suggests limited effects of the AC on the external

audit function.

Although one of the aims of the AIU is to promote behavioural change amongst

auditors in relation to audit quality through the performance systems of the audit

firm, as illustrated by the interview quotations below, the respondents did not

express support for statements regarding the influence of performance appraisal

systems in various aspects of the conduct of the audit. For example, low mean

scores were shown for the impact of performance appraisal systems on: compliance

188

with the technical requirements of auditing standards (mean 2.83), documentation

requirements (mean 2.83), auditor‘s technical expertise (2.67) and auditors‘

independence (2.58).

“If you look at how the key performance indicators or typical audit partner‟s

objectives that audit firms establish and this is an area which I am very

keen on that we go further on. There will be and partly as a result of the

work of the audit inspection unit and the firms are getting better at this.

There will be some attempt to assessing an audit partner based on quality

and these things have evolved from, in my day which I was conducting

audits” (R1).

“We expect to see links between that annual quality review process and

performance appraisals and we expect to see a link between performance

appraisals and remuneration and these links are becoming more specific and

clearer. We expect to see the results of our work reflected in performance

appraisals and the results of the firm‟s quality audit review reflected in

performance appraisals certainly” (R2).

Overall, the top five factors that influence the performance of the audit engagement

and potentially cause a variation of audit quality between audits, as rated by the

inspector respondents, are related to audit partner involvement, consultations

within the firm, training, internal reviews, and interaction and communication

between the external auditors and the client management.

7.4 The Level of Audit Quality Attained in Practice

Having discussed the desired attributes of audit quality perceived by the

respondents (section 7.2), and potential environmental and internal factors that

influence the achievement of audit quality in practice (section 7.3), this section

attempts to provide an analysis of respondents‘ views about the current level of

audit quality in practice. The analysis aims to identify the existence of problems

with audit quality in practice.

In general, the majority (83%) of the respondents agreed that the current level of

quality of audits in the UK is high indicating a high level of optimism regarding audit

quality in practice (see Table 7.12). Most of the inspectors (67%) agreed with the

statement that the quality of the audits has increased in the last decade, while 25%

of the respondents expressed a neutral view about the issue and only one (8%)

disagreed with the statement. Similarly, only 17% of the respondents agreed with

the statement that the quality of the audits in the UK has decreased in the last

decade, 58% of disagreed with the statement and 25% were undecided about the

issue. In general, the respondents perceived that the level of audit quality in

practice is appropriate, as the AIU put it, ‗the AIU considers the overall quality of

189

major public company audit work to be fundamentally sound‘ (AIU, 2009).

Nevertheless, the AIU also highlights that a high number of audits require

significant improvements based on their assessment in the recent public inspection

report (AIU, 2010, p. 3).

Table 7.12: General Views about Audit Quality in Practice

Id Issue Quality Inspectors

(n=12)

Mean Standard

deviation

1 2 3 4 5

1 In general, the quality of

auditing in the UK is high

-

1

1

10

-

3.75

0.947

2 The quality of auditing in the

UK has increased during the

last decade

-

1

3

8

-

3.28

1.231

3 The quality of auditing in the

UK has decreased during the

last decade

-

7

3

2

-

2.58

1.545

4 There is a high level of

consistency between audits in

the quality of auditing

achieved in practice

2

4

5

1

-

2.42

1.408

5 There is considerable

variation between audits in

the quality of auditing

achieved in practice

-

1

2

7

2

3.83

1.085

6 In general market

participants perceive the

standard of audit quality to be

adequate

-

4

2

6

-

3.17

2.065

7 General concerns about audit

quality in recent years are

based on a proper

understanding of the conduct

of audits in practice

3

7

1

1

-

2.00

1.128

Notes to table:

1. Response scale is: 1. Strongly disagree, 2. Disagree, 3. Neutral or no view,

4. Agree, 5. Strongly agree



Perhaps of more significance is the fact that half of the respondents perceived that

there is inconsistency between audits in the quality of auditing achieved. The

majority of the respondents agreed (either agree or strongly agree) that there is

considerable variation between audits in terms of the level audit quality attained in

practice. This suggests a potential variation in audit quality in different audit

engagements and audit firms inspected by the AIU.

190

The inconsistencies and variation could possibly be caused by audit partners‘

involvement in planning, technical and other consultations within the firm, training,

internal quality reviews and other internal factors within the audit firm (as

discussed in section 7.3, that is, all the factors commented on in previous section

about causes of variation in quality of individual audit engagement). Different audit

firms might have different resources in terms of people, policies and procedures,

internal processes and systems that may influence the production of the audit and

its quality. The variation may also be due to the inconsistency between the policies

and procedures that are established within the firm and its application on the actual

conduct of auditors, which may contribute to a deficiency in audit quality, as

pointed out by the AIU:

“...major firms have policies and procedures in place to support audit quality

that are generally appropriate...nevertheless, improvements to these

policies and procedures have been recommended at all firms...the number of

audits assessed requiring significant improvement at major firms (eight

audits or 11% of audits reviewed at major firms excluding follow-up

reviews) is too high. Firms are therefore not always consistently applying

their policies and procedures on all aspects of individual audits” (AIU Annual Report, 2009/2010, p.3).

Only half of the respondents believed that the participants in the audit market

perceived the standard of audit quality to be sufficient. Therefore, the current

perceptions about auditing legitimise the role of an independent oversight body to

restore trust and confidence of the users of audit services, in particular

shareholders and other stakeholders, concerning audit quality. However, the

majority of the respondents also believed that the concerns about audit quality in

recent years are not based on a proper understanding of the conduct of audits in

practice. One of the potential reasons for such a situation is because of the lack of

users‘ understanding of the audit function which can lead to unreasonable

expectations of audit services (Humphrey, 1991). This issue possibly indicates a

lack of understanding about how audit quality is achieved in practice, thus,

highlighting the unclear connection between the auditors‘ performance of work

tasks in practice and the notion of audit quality.

The questionnaire responses provide some evidence about certain issues that the

respondents have experienced during the process of inspections (Table 7.13). There

is strong agreement among the respondents concerning the lack of challenge posed

by the external auditors to their audit client. Ten out of twelve respondents stated

that the issue frequently or always appeared during the inspection process. The

respondents rated the quality of audit documentation the most common issue with

all of the respondents indicating that the adequacy of documentation either

191

frequently or always occurs during the inspection process. This view from the

inspectors is interesting to set alongside the comments of the audit partners

regarding the role of, and possible focus on, documentation in the inspection

process (see Chapter 5).

Table 7.13: Issues Arising in the Process of Inspection

Id Issue Quality Inspectors

(n=12)

Mean Standard

deviation

1 2 3 4 5

1 How often in the process of

inspection do issues arise

concerning the adequacy of

audit documentation?

-

-

-

6

6

4.50

1.28



concerning compliance with

auditing standards?

-

1

2

6

3

3.92

1.27



concerning the adequacy of

the auditor's 'challenge' to

management?

-

1

1

9

1 3.83 0.84



concerning the sufficiency of

audit work?

-

1

2

8

1

3.75

0.99


inspection are issues that

arise resolved by discussion

with the audit team

-

2

2

7

1 3.58 1.41




ethical standards?

-

1

4

7

-

3.50

1.30




international accounting

standards (IAS)?

-

2

4

5

1 3.42 1.41



concerning the

appropriateness of the audit

opinion?

3

7

2

-

- 1.92 1.07

Notes to table:

1. Response scale is: 1. Never, 2. Occasionally, 3. Seldom, 4. Frequently, 5.

Always



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The majority of the respondents stated that issues regarding the sufficiency of the

audit work arise frequently or always in inspections. Another significant area of

potential disagreement between the inspectors and the auditors concerns

compliance with auditing standards. Fifty percent of the respondents stated issues

of compliance frequently or always occur in the inspection process.

Despite this evidence of areas where audit inspections regularly lead to potential

doubts about aspects of audit quality, a large majority of the respondents indicated

that issues concerning the audit opinion arise never or only rarely in inspections.

This tends to suggest that the principal questions arise concerning aspects of the

process by which the audit is conducted and recorded rather than the

appropriateness of the final product in the form of the audit opinion issued.

The above analysis provides evidence of the areas of problem that arise in the

process of inspection. There are potential quality conflicts or disagreements

between the inspectors and the external auditors a variety of attributes of audit

quality. This may indicate some problems in the quality of audit performance in

practice. As stated in the recent inspection report published by the AIU (2010, p.

15) a significant improvement was required in some of the audits that they had

reviewed. Some of the reasons identified by the AIU in the report were related to

lack of evidence to support auditors‘ key audit judgements and some of audit

reports reviewed were signed before all the required work had been done. The

evidence from the survey supports such concerns of the regulator regarding certain

behaviours of auditors that could compromise audit quality.

The comments below, taken from the interviews with inspectors, provide some

practical evidence of the above concerns in the AIU assessment process. One

potential observation is that the regulator believes that a lack of challenge by the

auditors, evidenced in, for example, acceptance of a weak explanation from the

audit client, reducing the amount of work performed below what would be

considered reasonable and reducing the amount of documentation (which have

been identified as ‗quality threatening behaviour‘ in the literature, as discussed in

section 2.1.2) may potentially undermine audit quality. Surprisingly, one of the

interviewees mentioned the regularity of such incidents found in the inspection

process, which may suggest regular evidence of such behaviours in practice.

“Audit judgments are challenged and in that process we will raise queries for

the auditors to answer. It might be something as basic as we could not find

the bank confirmation letters or it could be something like the auditing

standards require an assessment of risk but the auditors did not test the

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design and implementation of the controls over those significant risks. That

is again very common” (R2).

“I had another example yesterday relating to a goodwill impairment

calculation for an organisation involved in property...we said “on what basis

did you accept the client‟s assertion that property transactions were going to

double in 2009 and then double again in 2010?” The initial answer you get

“there is no third party evidence that was the director‟s view”...effectively

they should be doing more audit work to support decisions made in the

accounts. So all I am trying to say is that actually we can challenge the

judgments but it is not an easy task” (R1).

This quotation below further implies some difficulty on the part of the AIU in

promoting the behaviour they see as consistent with high quality (such as providing

a robust challenge to the management and undertaking sufficient audit work)

because it will always be contested by the audit firm. One of the interviewees gave

practical evidence on the above issue, as follows:

“We often see very inconsistent conclusions being drawn by different people

or by different firms and indeed different teams within the same firm. The

number of shops that are visited in stock counts will differ markedly between

one team and another. Now it will be very difficult for us to say “well one is

right and one is wrong” especially as within that firm those responsible for

the methodology and technical advisory and professional practice would

argue that, would and more or less have to argue that both are right so we

cannot say that one. It would be difficult for us to say one is right and one is

wrong. So we challenge judgments made by the audit team, frequently

those judgments are around the acceptability or lack of challenge relating to

auditing and accounting issues and we aim to do that on all audits (R2).

In summary, the analysis suggests some evidence of disagreement between the

regulator and the external auditors in what is regarded as an indication of audit

quality in auditors‘ work performance. In addition, the analysis provides some

interesting evidence about areas where problems arise. Thus, suggesting some

potential problems in the achievement of high audit quality in practice.


Semi-structured interviews and a survey questionnaire were employed to elicit

evidence from inspectors who are part of the AIU within the FRC about what they

consider important in evaluating audit quality and what level of quality is achieved

in practice. This group is responsible for monitoring and ensuring the quality of the

auditing services. They are therefore in a good position to provide information on

the standing of audit quality and possible factors that influence the attainment and

operationalisation of audit quality in practice. Although the strength of conclusions

that can be drawn from the survey is limited by the small size of the group

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surveyed and the number of interviews conducted, the study nevertheless provides

some interesting evidence about the topic under research from an important group

that has not previously been incorporated in research.

The responses obtained from audit inspectors provide, first, evidence of the

existence of possible problems in the audit quality that is delivered in practice. The

issues that create problems are the quality of the ‗challenge‘ to management,

evidence and documentation. These are areas that lead to debate between the

quality inspectors and the auditors in the process of inspection. Potentially this

highlights the continuing difficulties faced by the regulator in changing certain

aspects of behaviour of the auditors and the content of audit work.

Second, the evidence suggests that the quality inspectors conception of the

meaning of audit quality is mainly related to aspects of audit performance related

to judgements and the conduct of audit work. Elements such as the adequacy of

challenge by the external auditors to the management, the sufficiency of audit

evidence that should be documented in the audit working papers and the concern

about the impact of accounting standards which require greater judgement

illustrate the importance of this aspect of the discourse of audit quality for the

inspectors.

Finally, the findings from the quality inspectors confirm that the concept of and

approach to audit quality in practice are influenced by economic and regulatory

factors in the auditing environment. They acknowledged that there is variation and

inconsistency in the quality of individual audits that they inspected and that this is

also potentially influenced by various factors that are internal to the firm and the

audit process such as audit partner involvement and the firms‘ monitoring controls

(through consultations, training and internal review).

In conclusion, this chapter shows that: (i) inspectors‘ perceptions and assessment

of the quality of auditors‘ work is substantially influenced by the process aspects of

the audit, (ii) concepts of and approaches to audit quality in practice are influenced

by firms‘ commercial interests and compliance obligations, (iii) the level quality

attained on specific engagements is influenced by various internal factors such as

the role of the audit partner, consultation and training, and (iv) there are a number

of potential problems of audit quality in practice observed by inspectors and there

will be continuing difficulties for the regulator to improve audit quality because their

work is likely to be contested by the external auditors.

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Chapter 8

Conclusion

8.0 Introduction

This chapter summarises and reviews the empirical evidence presented, makes

comments concerning possible public policy implications arising from the study and

makes suggestions for future research. The main body of the research that

comprises this thesis is contained in the four previous chapters. In chapter 4,

various issues relating to audit quality from comments submitted in response to the

FRC discussion paper ‗Promoting Audit Quality‘ were identified in order to draw out

areas for further investigation in the subsequent elements of this study which were

reported in chapters 5, 6 and 7. In these chapters perceptions of auditors, AC

members and quality inspectors concerning audit quality in practice were explored.

This thesis extends previous studies on audit quality by broadening the theoretical

and empirical approaches to understanding the meaning of audit quality. Rather

than looking at indirect signals of the level of quality achieved, the research has

focused on the meaning contained in how audit partners, AC members and quality

inspectors talk about the concept of audit quality, that is, how these people

internalise and make sense of the term ‗audit quality‘. This thesis has sought to add

to understanding concerning what factors influence the practical construction of the

term audit quality and how the concept affects the content and conduct of auditors‘

approach to audit engagements, and AC members‘ and quality inspectors‘

evaluation of audit quality on those engagements.

A review of the literature argued that most of the earlier research on this subject

has employed a functionalist approach in investigating the topic of audit quality,

which emphasises variables and hypotheses derived from agency theory to predict

association between possible input and output signals that could be indicative of

variations on audit quality and show possible cause and effect. Despite the

important contribution of such research to the body of knowledge on audit quality,

it provides limited information about what the term means to different actors (such

as auditors, AC members and quality inspectors) and how organisational and social

factors that exist in the auditing environment may shape and influence their

understanding and operationalisation of the term ‗audit quality‘, and therefore

those actors‘ actions. Since the basic contention of the thesis is that perceptions

about audit quality in practice are shaped by various interrelated factors in the

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audit environment, a theoretical and methodological framework that is capable of

providing a richer and more meaningful way of exploring the concept‘s meaning

and identifying the factors influencing that meaning is needed. Therefore, a

qualitative approach has been considered suitable in order to provide insights into

factors that may shape the meanings and perceptions. A theoretical framework and

a methodology capable of addressing the complex nature of the interactions of

various factors that have shaped and influenced the meaning and perceptions of

audit quality are necessary. For this reason, symbolic interactionism was chosen as

a theoretical or analytical perspective and document content analysis, face-to-face

semi-structured interviews and a survey questionnaire were employed to address

the research subject for the thesis.

This chapter has three main sections. Section 8.1 provides a review of the findings

of the study. The contributions to research and implications for public policy of this

study are highlighted in section 8.2. Finally, section 8.3 outlines the limitations and

suggestions for future research.

8.1 Review of Significant Findings

This section offers some reflections on the results of this study regarding

understanding of the meaning of concept of audit quality by key participants in the

audit process, the influence of various internal and external factors in the auditing

setting on the meaning and representations of that meaning in practice. This

section attempts to emphasise that the meaning of audit quality is context

dependent and must be understood within its social, organisational and institutional

context.

In chapter 4, the comments of the 39 respondents to the discussion paper

‗Promoting Audit Quality‘ made by the FRC were analysed in order to gain an

understanding of the issues surrounding audit quality as perceived by parties

sufficiently interested to submit comments. As illustrated in this study, the concept

of audit quality develops dynamically and is influenced by many factors which are

prevalent in the auditing setting. The process and impact of regulatory

development may be significant, as are the economic environment and the

influence of interactions between different parties (such as audit committee,

regulator and audit client) with particular roles in the auditing system.

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In chapter 5, 6 and 7 findings on perceptions of audit partners, AC members and

quality inspectors concerning the meaning of audit quality in practice were outlined

respectively. One general conclusion from this work is that the three groups have

subtly different ways of constructing their perceptions of audit quality in practice.

The first group of individual audit partners consider audit quality as resulting from

the combined effects of parameters tied to client service, regulatory compliance,

the technical process or methodological content of the audit, and individual

auditors‘ characteristics. The factors tied to client service are considered to be more

critical than other factors. These factors include meeting client‘s expectations and

providing value added and value for money audit services. This aspect of audit

quality was also recognised by the AC members who did refer to value added

services to quality of communication and the relationship with the external auditor

reflecting their interest in service quality. In contrast, although the quality

inspectors acknowledged the influence of commercial aspects on the meaning of

audit quality in practice, they did not consider aspects of service quality to be

important and relevant evidence of audit quality.

For the audit partners, among the factors tied to compliance and regulatory factors

that were perceived as influential to the notion of audit quality are the quality of

documentation of the audit process and the quality control applied within the audit

firm. This aspect of quality overlaps with the views of the third group (quality

inspectors). An additional conclusion from the study is that it makes clear the

influence of regulatory factors on the audit partners‘ conception of audit quality.

Finally, the audit partners also give high importance to factors tied to the individual

auditor‘s attributes, such as professional judgement, independence and competence

to the construction of audit quality. This aspect of audit quality was also recognised

by the other groups. This implies the importance of auditors‘ professionalism to the

meaning of audit quality in practice, which does have some connection to

independence as one of the two attributes (together with technical competence)

reflected in the explanation of audit quality most commonly cited in the research

literature (DeAngelo, 1981a). Overall, audit partners have been shown to build

conceptions of audit quality beyond the ‗technical‘ or core aspects of the auditing

profession to accommodate a large range of attributes such as the relationship with

audit client, applied methodology, work processes and documentation. These

factors are taken into consideration by partners in making their quality judgements.

Most notably the partners‘ understanding appears to place the audit client at the

core of audit quality, which provides an interesting complement to other research

198

which has shown that finance directors rate aspects of service quality higher than

the technical quality of auditors (Duff, 2004).

The second group represented by the AC members reveal quite a different view of

audit quality from the other two groups of the study. An important first conclusion

from this part of the research is that for AC members the notion of audit quality is

mainly tied to the ‗relational‘ rather than the technical attributes of individual

auditors. In this case, professional appearance, which is a function of the

interpersonal and behavioural skills of individual auditors during their interaction

and communication with the AC, seems to play an important role in constructing

the meaning of audit quality for the AC members. However, this group did also

consider factors related to the attributes of individual auditors (such as

competence, knowledge and independence) as important to the notion of quality,

similar to the perceptions of the other two groups. In contrast, to the opinions

expressed other two groups, audit firm attributes (size and industry specialisation)

are also considered by AC members in forming their understanding and perceptions

of audit quality. The study has showed that the AC members very much rely on

such features in their conception of audit quality, partly due to their limited access

to evaluate the detailed conduct of the actual audit engagement.

Finally, a significant finding from the work with AC members was that the quality of

the financial statements dominated the AC members‘ perceptions of audit quality

rather than a technical interpretation of the quality of the audit process itself. This

perhaps reflects the unobservable nature of audit quality and the AC‘s focus on the

output of the financial reporting process. It was apparent during the interviews that

the majority of the AC members strongly associated audit quality with the reported

numbers on completion of the audit or the resulting outputs. This emphasis reflects

how the AC members strongly associated audit quality with the end product of the

financial statements. This is in notable contrast to the position with audit partners,

who emphasised compliance with the auditing standards in the conduct of the audit

but rarely referred to the quality of information in the final audited financial

statements as a signal of audit quality. In contrast, the audit partners placed

emphasis on compliance with the auditing standards in the process of an audit

rather than the financial statement output for their meaning of audit quality. In

general, AC members appear to derive confidence regarding audit quality through

factors mainly relating to ‗interpersonal‘ aspects of the audit related to behavioural,

presentation and interpersonal skills of external auditors than on the audit work

itself.

199

The third group included in his study, quality inspectors who are the members of

the AIU, exhibit quite a different view of audit quality to the other two groups.

Notably, this group attached more importance to the conduct or content of an audit

as key to the concept of audit quality. For this reason, the level of challenge to the

management of the audit, the sufficiency of evidence and documentation are

important to inspectors in constructing their perceptions of audit quality. Similar to

the audit partners, this group also gives high importance to factors tied to quality

control applied within the audit firm and various ‗compliance‘ attributes of the

notion of audit quality. The quality inspectors‘ view also overlapped with those of

the audit partners and AC members on the relative importance of auditor‘s

competence and independence to audit quality. However, there is a significant

contrast between the quality inspectors and audit partners regarding the position of

service quality attributes as key constructs for audit quality in practice. Overall, this

study shows that inspectors build their meaning and perceptions on a range of

attributes that relate to: audit process or content, internal and external compliance

aspects, and individual auditors‘ characteristics. Most essentially inspectors place

the audit process and conduct at the core of audit quality, which might reflect the

ability of the audit quality inspectors to, and their responsibility to, examine directly

the content and conduct of individual audit engagements, in contrast to other non-

auditor actors in the auditing system.

Taken together, the results from the research involving three important groups who

have responsibilities for assessing audit quality in practice show the social meaning

of audit quality and illustrate the socially constructed nature of auditing activity and

the multifaceted meanings that can be associated with audit quality. This aspect of

the evidence from this study supports the observations reached by Fischer (1996),

who recognised the socially constructed nature of audit quality which derives from

its unobservable nature.

From the interactionist perspective, Blumer (1969) and Charon (2007) have

suggested that social meaning is best understood in terms of interaction between

people and their environment and the role of various representations to signify

meaning. The literature addressing audit quality in an organisational and social

context (section 2.1.5) suggests role expectations, economic and regulatory factors

may influence and shape the practices or performance of auditors. It also highlights

how, in the absence of observable features on audit quality for both practitioners

and users of audit services, audit practices and other ‗impression techniques‘ are

not only important to represent the technical audit function but it also for the

legitimacy of auditors‘ conduct and the knowledge base of audit. This study reveals

200

a variety of technical, compliance and service concepts attached to the meaning of

audit quality, reflecting influences from internal and external factors in the auditing

setting. Therefore, the contextual dependence of the meaning of audit quality and

possible understanding of factors that influence and shape meaning and perceptions

concerning audit quality have been made evident. For example, a notable finding

arising out of the interviews with the audit partners was the apparent influence of

commercial interests or client service on the meaning of audit quality and that the

wider societal obligation had more limited influence on the meaning of audit quality.

The issue of economic interdependence and imbalance of power between the

management and external auditor have put pressures for the external auditor to

deliver ‗quality‘ that is expected by the audit client. This potentially opens up the

issue of vulnerability to, and economic dependence on the demands of company

management. Therefore, it resurrects the issue of expectation gaps that have long

been associated with auditing.

In the case of AC members, their conception of the meaning of audit quality is

greatly influenced by auditors‘ presentations and communication during

interactions. The external auditors seem to play an important role in AC members‘

understanding and constructing meaning and perceptions of audit quality. Further

reflection on this issue shows that the limits of the knowledge and expertise of the

AC members and their need to demonstrate a credible image for the legitimacy on

their role may shape and influence the meaning and perceptions of audit quality for

this group.

The review of the research literature and also other policy documents that relate to

audit quality points out that the concept of audit quality has a dynamic and context

based aspect; different interpretations of audit quality may be held by different

people and drivers or factors that influence audit quality may change over time

(see, for example, Sutton, 1993; Rasmussen and Jensen, 1998; FRC, 2007). This

perspective is consistent with the findings of this study which show in greater depth

not just the existence of diversity but also the variety of constructs used to give

meaning to audit quality. For example, the key construct for quality as understood

by the audit partners is related to what is expected by the audit client and

potentially is influenced by the commercial interests of the audit firm. At the same

time, auditors are also expected to deliver audit quality that is expected by the AIU

on behalf of the society or what the practitioners themselves believe concerning

suitable technical audit quality that should be delivered in practice. This study

suggests the variety of constructs of audit quality may potentially reflect subjective

construction of the term resulting from interplay between various internal and

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external factors prevalent in the auditing environment. Nevertheless, the manner in

which these factors lead to real differences in specific audit practices remains an

open question. One potential conflict identified by this study is that between client

services and other constructs of audit quality.

Audit quality is connected to the value of audit services, yet there is no accepted

authoritative definition of what it is and what constitutes a quality audit is not

simple to answer. In the absence of such objective evaluation of what it is, it

appears that all audit practitioners have to create and rely on various

representations to signify or convey quality in their work: presentation, professional

qualification, training, audit working papers or guidelines and standards in planning

and executing audits. The identification of reliance on various representations to

signify audit quality is well established in the literature (see section 2.1.5) and is

consistent with observations made during the course of conducting this study.

Further both extant literature and the evidence from this research suggest that

representations are not only important to symbolise quality but are also important

tools in practice to legitimise auditors‘ actions and knowledge base, mobilise

commercial interests and maintain the ‗social order‘ of the financial and auditing

systems (see, for example, Richardson, 1987; Richardson, 1988; Power, 1996;

Power, 2003; Carrington, 2010). This study suggests that the notion of audit

quality can be seen as a ‗language‘ without ‗technicity‘ that has been called upon by

various audit constituents to give meaningful debate that there high quality

auditing is being delivered. This is not meant to say that there is no high quality

auditing but rather that the way in which the debate about audit quality is driven is

partly to maintain legitimacy and convey certain impressions of what is done by

various constituents in the auditing setting in the name of audit quality. Audit

practitioners‘ use of the term of audit quality and associated symbols can be

understood as providing a socially integrative function for the auditing profession

and also maintaining the legitimate authority of the profession with respect to

auditing and financial accounting. For AC members, their understanding of the term

of audit quality, and their function and operation in relation to external audit are

very much influenced by the external auditors themselves. This highlights the

potential ceremonial role rather than the substantive purpose of the AC. In a sense,

the whole debate about audit quality has symbolic representations that help to

maintain confidence that auditing is worth doing and that each of the significant

parties in the system is aiming for high audit quality.

One concern of this research was to investigate the influence of ACs on audit

quality and it is worth noting that all the groups in this study provided only limited

202

evidence on the impact of ACs on audit practice and the external audit function.

This finding is consistent with studies such as Cohen at al. (2002) and Turley and

Zaman (2007) which report a minimal impact of the ACs on audit process and

external auditor activity. In comparison, the three groups provided mixed views

concerning the impact of the AIU on auditor‘s work performance.

8.2 Contributions and Implications of the Study

By adopting symbolic interactionism as a theoretical approach and employing a

qualitative research design, this study attempts to contribute to the understanding

and knowledge on audit quality by researching this issue within the organisational

and social context of audit practices. This approach is relatively unrepresented in

existing research but provides insight into the complex and dynamic interactions of

factors such as economic interests, role expectations and regulations that impact on

the meaning of audit quality and the practices of various constituents in the

auditing setting. This perhaps has added a new dimension to the research in this

field.

With regard to the audit quality literature, this study enhances the understanding of

the nature of audit quality from the practical perspective of those who provide the

audit services and those who are responsible for monitoring them. This perspective

is also drawn from the context of auditing within the UK, whereas much of the prior

research has been dominated by studies conducted with reference to the US

environment (as evidenced in, for example, the surveys of Watkins et al., 2004 and

Francis, 2004). In addition, much of the audit quality literature that attempts to

investigate the association between some ‗input‘ and ‗output‘ measures of audit

quality adopts a large-scale market-based approach or survey-based approach

(Humphrey, 2008). These studies have tended to use competence and

independence as a framework of analysis without seeking greater in-depth

understanding concerning people‘s thought processes and consciousness of what

constitutes an audit of high or sufficient quality. The research reported in this thesis

therefore complements existing research through opening up the rationales and

potential behaviours which lie behind commitments to quality by those involved in

commissioning, delivering and assessing actual audit engagements.

The current study has shown that the meaning of audit quality is situated within the

context in which it applies, how it is influenced and shaped through the interaction

between internal and external factors in the auditing setting, and what the meaning

symbolically represents within audit firms and to the outside world. The study

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suggests that to some extent audit quality means different things and serves

different purposes in different places and different times, and that context is critical

to an understanding of practice. Thus, this research highlights the importance of

studying the meaning and construction of audit quality in its context and provides

some insights into the meaning of the concept and some of the constructs

employed to give it meaning. This finding has theoretical relevance, suggesting that

the meaning of audit quality and its impact on audit practice and oversight process

can be better understood by analysing it in relation to different interests,

expectations and the sources of legitimacy of those involved.

In addition to insights into the meaning of audit quality and some of its concepts,

this study advances the existing knowledge about the influence of interactions of

internal and external factors in the auditing environment to the construction and

representation of the meaning of audit quality in practice. The used of symbolic

interactionism allows greater insights into the complex interrelationship of factors

impacting meaning and perceptions of audit quality based on respondents own

experiences. For example, this study explains how economic and regulatory factors

influence the notion of audit quality, and, in consequence, the operation and

activities of audit practitioners. This study also reveals how acts (e.g., external

auditors‘ presentations and asking challenging questions) and objects (e.g., written

reports, training and consultations) are used to signify and communicate audit

quality in practice. In like manner, AC members‘ meaning and perceptions of audit

quality are very much influenced and shaped by their interactions and

communications with the external auditors. This study shows the important role of

the external auditors (in terms of auditors‘ presentations and reports) in

constructing and representing a meaning of audit quality for the AC members.

Audit quality is a complex thing and attempts to investigate its meaning as an

influence on practice in the conduct of audit engagements and audit evaluations

with reference to the broader societal and organisational context enhance our

understanding of the process through which auditors, AC members and quality

inspectors believe that appropriate audit quality has been achieved. It is hoped that

the findings of this study will be of value to the regulators, audit practitioners, AC

members, audit clients and other interested parties. A number of implications are

identified from the findings in this study.

The concept of audit quality in practice highlights the inherent tensions between,

and sometimes within, the elements of audit quality. From a practical point of view,

it can be concluded that the auditors are searching for a difficult balance between

204

related and competing dimensions of audit quality. From the point of view of the

audit profession and regulator, how to address the inherent tensions in auditing is

particularly important. The study also shows the unintended consequences of the

inspection process for audit quality. The implications relate to how policy-makers

should be able to identify these tensions and position actions related to the

promotion of audit quality accordingly. The role of the regulator should give

appropriate consideration to the positioning of audit quality issues at the

intersection of competing forces. The issue of regulatory policy in relation to audit

quality remains a matter of active debate currently, as reflected in the European

Commission Green Paper published in the autumn of 2010 (EC, 2010), and the

discussion in this study shows how care is needed in using ‗quality‘ as a means to

justify or encourage acceptance of regulatory action.

For practitioners and firms there are issues concerning how choices are made when

conflicts arise between, for example, meeting quality as required by their audit

client and meeting their professional obligations and roles to the public at large.

The research has shown potential tensions and conflicts in relation to audit quality

because of various role expectations on external auditors by different parties with

whom the audit practitioners interact, whether in terms of satisfying business

demand for profits or their professional obligations. Considerable potential conflicts

between the different meanings to audit quality were alluded to by both audit

partners and quality inspectors. The drive for audit quality may, therefore, simply

reinforce rather than resolve the issues about expectations and roles that have long

been associated with auditing.

This study shows that the operations and processes of ACs in relation to audit

quality include a ceremonial function and highlights the limited impact of the AC on

audit quality and the external audit function. This may imply that AC members

require greater understanding of their roles and need to acquire the appropriate

type and level of skills and expertise to make them function more effectively. The

significant efforts by regulators and legislative bodies in recent years towards

greater codification of AC characteristics and operations may not necessarily

enhance their governance contribution. Further issues can also be raised with

regards to how to assess the quality of the governance contribution of the AC itself.

One approach is to make AC processes more visible through more disclosures about

the work performed by the AC with the introduction of public reporting by ACs.

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This study identifies that the role for a technical specification of the concept of audit

quality may be limited and suggests the rhetorical meaning and exploitation of the

term ‗audit quality‘ potentially limits what can be achieved for enhancing audit

quality in practice. Inconsistent language is employed in claims or discussions of

audit quality by key participants in the audit process. Therefore, calls from different

parties to ‗standardise‘ or enhance audit quality may potentially obscure or hide

differences in perspective between participants in the audit process.

8.3 Limitations and Suggestions for Future Research

Whilst this study may have provided theoretical and empirical contributions in

several respects, like any research, it is subject to certain limitations. Principally

these relate to the scope of groups included in the research, the extent of coverage

of these groups, the degree to which the evidence collected provides a picture of

actual practice on real engagements and the limitations of the methods of data

collection.

This study is exploratory in nature and only covers perceptions concerning audit

quality from the perspective of audit partners, AC members and quality inspectors.

Thus, one limitation of the study is that it excludes some key participants in the

auditing system such as financial directors of companies, others in executive

management, information intermediaries and institutional shareholders. Future

research could focus on the perceptions of these participants to establish if they

share a common understanding of the concept of audit quality with the groups

covered in this research or use additional constructs to give meaning to the term.

Such groups have been included in previous research in the general area of audit

expectations, where differences between the views of auditors and others have

illustrated the presence of an ‗expectations gap‘, and it may therefore be productive

to research further whether there is also a gap regarding understanding of audit

quality. In addition, perceptions about audit quality from those who are directly

involved in the detailed audit work such audit managers, audit seniors and junior

staff might add further insights about the practical operationalisation of audit

quality.

A second limitation of the study is that the coverage of the groups included was

constrained by practical issues concerning access to individuals and the time

available and future research could attempt to expand the number of individual

participants, possibly through wider survey methods. Interviews were chosen as the

primary method of data collection to enhance the ability of the study to identify

206

constructs and symbols that individuals use to represent the general concept of

audit quality. Further research could then take these constructs and develop

research instruments to reinforce their significance by surveying their relevance to

much larger groups of participants. As noted above, surveys have frequently been

used to investigate expectation of auditor roles and responsibilities and similar

methods could be employed in respect of audit quality based on the results of this

project. Another possible fruitful line for future research would be to consider using

laboratory type experimental of research to examine the influence of the different

constructs of audit quality by different people to audit performance or assessment

of audit quality. Again there is a well-established literature looking at the

psychology of auditors‘ judgement and decision-making and the findings of the

current study could be developed into experimental tasks with auditors and other

groups.

An important motivation for this study was a concern to go beyond existing

approaches to audit quality which focus on testing the association between certain

available indirect signals of possible input and output quality and to ask questions

about how the concept of audit quality is given real practical meaning by those

involved in audit engagements; in other words to understand more about the

process through which significant parties in the audit system determine that

adequate audit quality is produced. However, it must be acknowledged that,

although the study has involved direct contact with participants in the audit quality

process, it still only offers indirect evidence of actual practice. The main data from

the three groups were gathered through interviews and survey rather than direct

examination of the content of audit work and its evaluation in actual audit

engagements. Is felt that these methods of enquiry are still appropriate because

the study is investigating perceptions of quality held by key groups and an

objective scale by which to measure quality on specific assignments does not exist,

but observation of auditors‘ actual work assignments or quality inspectors‘ work

documents or the proceedings of AC meetings would also be relevant methods of

study. It should be recognised, however, that such research would have to

overcome significant obstacles regarding being allowed access to review the

documents or attend the meetings. Although a study of audit quality in practice

using interviews is restricted regarding what conclusions can be drawn from a small

number of people, the objective of an interpretive approach is not wide

generalisation, but to provide an enhanced understanding of the particular issues

being researched. Another possible line of research to explore may be to use the

207

findings from this study to develop a framework which could be used to analyse

behaviour in specific case studies of audit engagements.

Finally, another aspect of the research for which limitations must be recognised is

the possible existence of various forms of bias, subjectivity and interpretation that

are inherent in qualitative research (for example, personal bias and self-serving

responses by interviewees). Careful attention was paid to the pursuit of a rigorous

and comprehensive approach concerning the collection and analysis of data, as

highlighted in Chapter 3, but such limitations are still possible. Limitations of

research method affect all forms of research enquiry. In this study as in many

others these do not necessarily undermine the validity of the research and its

contribution to understanding of the subject of the enquiry but are characteristics

which must be borne in mind when placing the study alongside the wider body of

research to which it contributes.

208

Appendices

Appendix 1: Summary of Discussion Paper and Questions posed to the

Respondents by the FRC

Appendix 2: Analysis of Comments submitted to FRC on Discussion Paper Promoting Audit Quality

Appendix 3: Letter to Interviewees

Appendix 4: Interview Guide

Appendix 5: Survey Questionnaire

209


respondents by the FRC

The culture within an audit firm

In ‗Promoting Audit Quality‘ the FRC identified the following indicators of audit firm

cultures that enhance audit quality :

o Leadership of firms emphasising the importance of auditors discharging their

professional responsibilities.

o Respect for the principles underlying auditing and ethical standards.

o Partner and staff development systems that promote personal

characteristics essential to quality auditing.

o Not letting financial considerations drive decisions with a negative effect.

o Promotion of consultation on difficult issues and providing sufficient

resources to deal with issues as they arise.

o Development of an information infrastructure to support the audit function.

Possible threats to an audit firm‘s culture:

o Audit leadership having insufficient input to the firm‘s management

decisions

o Over-emphasis on winning and retaining audits.

o Excessive cost cutting in times of economic downturn.

o Insufficient importance placed on technical training.

and asked the following questions:

1. Are there other important factors of an audit firm‘s culture that are not referred

to above?

2. Are there pressures that could compromise the culture of audit firms that have

not been identified above?

3. Are there any further steps that should be taken to build confidence in the

culture of audit firms and, if so, what might they be and why are they needed?

The skills and personal qualities of audit partners and staff

In ‗Promoting Audit Quality‘ the FRC identified the following key drivers of audit

quality:

o The skills base of partners and staff.

o The training given to audit personnel.

o The approach to appraisal of partners and staff.

Possible threats to the skills of an audit team

o Failure to develop the necessary personal characteristics through effective

mentoring.

o Failure to retain staff with the necessary experience and expertise.

o Allocating more capable staff on the basis of client prestige rather than audit

risk.

o Insufficient or ineffective training.


4. Do you agree that technical skills, personal qualities and practical experience are

key drivers of audit quality?

5. Has this paper identified the issues that could result in an inadequately trained or

skilled workforce for audit – if not, what other issues are there and why are they

issues?

6. Should there be a fundamental review of the qualification and training

requirements for auditors?

210


respondents by the FRC, continued

The effectiveness of the audit process

In ‗Promoting Audit Quality‘ the FRC identified the following features of an effective

audit process:

o The structure, experience and knowledge of the audit team is appropriate

for the engagement and resources are sufficient to enable a considered

response to issues that may arise;

o High quality technical support is available when the audit team encounters a

situation it is not familiar with;

o The audit methodology is well structured and:

Provides a framework and procedures to obtain sufficient appropriate

audit evidence effectively and efficiently.

Provides for compliance with auditing standards without inhibiting

exercise of judgement.

Requires appropriate audit documentation.

Ensures there is effective review of audit work.

o The objectives of ethical standards are achieved, providing confidence in the

integrity, objectivity and independence of the auditor; and

o Audit quality control procedures are effective, understood, applied and

monitored within firms and across international networks.

Possible threats to effective audit process

o Increased use of computerised audit methodologies may distance auditors

from the company being audited, reduce flexibility and result in time spent

coping with the technology at the expense of evidence gathering.

o Over prescriptive auditing standards, regulation and audit methodologies

can have adverse impacts such as:

Insufficient emphasis on tailoring audit procedures to specific

circumstances

Inhibiting the exercise of judgement

A focus on producing documentation at the expense of performing

audit procedures properly.

o ‗client capture‘ where the relationship with the client is so close that

objectivity is impaired


7. Are there other factors that determine whether an audit process is effective?

8. Are there threats to the effectiveness of the audit process that have not been

identified before?

9. Are there further steps that could be taken to counter the threats to the

effectiveness of the audit process?

211



The reliability and usefulness of audit reporting

In ‗Promoting Audit Quality‘ the FRC identified the following characteristics of

reliable and useful audit reporting:

o The form of the auditor‘s report is highly codified and standardised.

Key elements are specified by law and auditing standards

A clean auditor‘s report operates as a signal rather than a source of

New information

Confidence in the auditor‘s report is inextricably linked to confidence

in the presumed quality of the audit process.

o Good communication with audit committees. Benefits include:

Encouraging a dialogue about the scope of the audit.

Providing a forum to discuss the key risks identified and judgements

made in reaching the audit process.

Discussing qualitative aspects of the entity‘s accounting and reporting

and potential ways of improving financial reporting.

Threats to confidence in audit reporting

o The FRC is conscious that some users and commentators have concerns

about:

Whether the scope of the meaning of ―true and fair view‖ was

restricted following the introduction of IFRS. This is being addressed

by the Companies Act 2006.

Whether auditors are properly fulfilling their legal responsibilities to

consider the adequacy of a company‘s accounting records.

Whether auditor‘s reports should be more informative about key

audit issues and

asked the following questions:

10. Are there factors that determine whether audit opinions command confidence?

11. Are there other reasons why users may not have confidence in the audit

opinion?

12. Are there further steps that could be taken to reinforce the confidence in an

audit opinion?

212



Factors outside the control of auditors affecting audit quality

In ‗Promoting Audit Quality‘ the FRC identified the following influences on audit

quality that are outside the control of auditors:

The approach taken by management;

o Good corporate governance plays a major role in ensuring companies attach

appropriate importance to corporate and financial reporting and to the audit

process.

o Nevertheless, there will always be a risk that management may be

motivated in some circumstances to obstruct the audit process.

The contribution made by audit committees;

o Although the auditor is responsible for the planning and scope of the audit,

the audit committee can be of considerable significance in areas such as:

Considering the scope of the audit and major risk areas

Being satisfied as to the appropriateness of the audit plan and audit

resources.

The role of shareholders and commentators;

o Support of auditors, where appropriate, by shareholders increases the

likelihood that directors and management will comply with their obligations

in relation to the preparation of reliable financial statements.

The role of litigation;

o The liability regime in the UK is being reformed in a way that is designed to

ensure that exposure to litigation remains a stimulus to audit quality.

The approach of regulators;

o Regulators need high quality staff, able to assess whether audit firms have

undertaken high quality audits in compliance with the principles of

professional standards. for this to work, audit firm must also adhere to the

principles.

The pressures caused by the accelerating reporting regime.

o Tight reporting deadlines limit the opportunity for detailed work by auditors

after the reporting period and results in increased reliance on work

performed before the end of the reporting period.


13. Are there other external factors that have the potential to affect adversely audit

quality?

14. Are audit committees discharging their responsibilities in relation to audit

adequately, and if not, what further steps might be taken to make their role more

effective?

15. Should the FRC develop more detailed guidance for audit committees in relation

to the evaluation of audit effectiveness?

16. Should annual reports include a summary of the work undertaken by the audit

committee to evaluate audit effectiveness?

17. Are there further steps that should be taken to reduce the risk that these

external factors may adversely affect the audit process?

213

Appendix 2: Analysis of comments submitted to FRC on Discussion Paper

Promoting Audit Quality

This section presents analysis of responses submitted to the FRC on the discussion

paper for promoting audit quality. All of the respondents are listed in the

accompanying table, together with an analysis of the responses on seventeen

specific questions and others issues. Responses of the each respondent in respect

of each of these issues are tabulated. Columns 1-17 provide and analysis of

responses to the specific questions posed by the FRC, thus the major of

respondents addressed these questions and a variety of opinions were expressed.

An explanation of all columns is provided below.

The Culture within an Audit Firm

Column 1 Q1

Are there other important indicators of an audit firm‘s culture that are not referred

to above?

A. Level of partner involvement with audit client

B. Greater transparency on governance and control of the audit firm

C. Review from the inspection bodies

D. Ownership and control of the audit firm

E. Professionalism

NC No significant comment

NA Not available

Column 2 Q2

Are there pressures that could compromise the culture of audit firms that have not

been identified above?

A. Effect of regulation and regulators

B. Commercialisation of the audit firm

C. Staffing - hiring and retaining of auditor

D. Audit fees set at level that is not adequately rewards the service

provided/practice of low balling


NA Not available

Column 3 Q3

Are there any further steps that should be taken to build confidence in the culture

of audit firms and, if so, what might they be and why are they needed?

A. Greater transparency of the audit firm governance and control

B. Create dialogue or communication among audit market participants

(auditors, regulators and investors)

C. Greater involvement of audit committees to support role of auditor

D. Role of inspection bodies to recognise and emphasis positive aspects of the

audit firm

E. Auditor legal liability


NA Not available

Column 4 Q4

Do you agree that technical skills, personal qualities and practical experience are

key drivers to audit quality?

A. Respondents indicate agreement


NA not available

214


Promoting Audit Quality, continued

The Skills and Personal Qualities of Audit Partners and Staff

Column 5 Q5

Has this paper identified the issues that could result in an inadequately trained or

skilled workforce for audit – if not, what other issues are there and why are they

issues?

A. Respondents indicate yes

B. Not - rapid changing, excessive and/or overly complex standards and

regulations

C. Not – hiring and retaining audit staff

D. Not – inadequate wider business knowledge

E Not – increasing internationalisation of companies


NA Not available

Column 6 Q6

Should there be a fundamental review of the qualification and training requirements

for auditors?


B. Respondents indicate no

C. Should be left to the UK professional bodies


NA Not available

The Effectiveness of the Audit Process

Column 7 Q7

Are there other factors that determine whether an audit process is effective?

A. Auditor relationship with audit client

B. Auditor relationship with audit committees

C. Attractiveness of the audit profession – hiring and retaining staff

D. Effect of regulation and regulators


NA Not available

Column 8 Q8

Are there threats to the effectiveness of the audit process that have not been

identified above?

A. Rapid changing, excessive and/or overly complex standards and regulations

B. Inadequate involvement of specialist

C. Lack of co-operation and support from audit client

D. Lack of co-operation and support from audit committees

E. Changes of partner rotation

F. Inadequate use of computer-aided techniques


NA Not available

215



Column 9 Q9

Are there further steps that could be taken to counter the threats to the

effectiveness of the audit process?

A. Respondents indicate no

B. Increase period of partner rotation from 5 to 7 years

C. Introduce joint audit for large listed companies

D. Promote and support principle based audit approach

E. Emphasising risk based audit approach

F. Introduce rotation of audit firm


NA Not available

The Reliability and Usefulness of Audit Reporting

Column 10 Q10

Are there other factors that determine whether audit opinions command

confidence?

A. Use principles rather than rules based approach in auditing and financial

reporting standards

B. Reputation of audit firm and audit profession

C. Role of inspection bodies or regulators

D. Greater information from the audit firm

E Role of audit committees


NA Not available

Column 11 Q11

Are there other reasons why users may not have confidence in the audit opinion?

A. Moving away from principle to rules based approach

B. Lack of information on operation, governance and control of the audit firm

C. Understand ability - length and legalistic wording

D. ―Audit expectation gap‖

E. Poor communication between auditor and/or audit committees and users


NA Not available

Column 12 Q12

Are there further steps that could be taken to reinforce confidence in an audit

opinion? In particular, what changes to the form and content of the audit report

should be considered?

A. Gives consideration to suggestions made by the Audit Quality Forum

B. Report should be simplified

C. Review formats and style of report

D. Deserve separate and detail discussion

E. Enhance communication between auditors and/or audit committee and

shareholders


NA Not available

216



Factors outside the Control of Auditors Affecting Audit Quality

Column 13 Q13

Are there other external factors that have the potential to adversely affect audit

quality?

A. Rapid changing, excessive and/or overly complex standards and regulations

B. Increasing globalisation and internationalisation of business

C. Culture of audit client

D. Lack of consensus about definition of audit quality


NA Not available

Column 14 Q14

Are audit committees discharging their responsibilities in relation to audit

adequately, and if not, what further steps might be taken to make their role more

effective?


B. Not – FRC develop a means to apply pressure to company and/or audit

committees

C. Varies between companies

D. Not – owner representation on the audit committees


NA Not available

Column 15 Q15

Q15 Should the FRC develops more detailed guidance for audit committees in

relation to the evaluation of audit effectiveness?


B. respondents indicate no

C. FRC should discuss with audit committee


NA Not available

Column 16 Q16

Should annual reports include a summary of the work undertaken by the audit

committee to evaluate audit effectiveness?


B. Respondents indicate no

C. Up to the company


NA Not available

Column 17 Q17

Are there further steps that should be taken to reduce the risk that these external

factors may adversely affect the audit process?

A. Better understanding of roles between the participants in the corporate

reporting chain

B. Need to avoid initiative overload

C. Maximise audit committee‘s talent

D. Examine regulators and quasi-regulators approach (FRC and other relevant

parties - timely recommendations and outcomes delivered)

E. Effective audit planning


NA not available

217



Other significant issues

Column 18 Discussion paper

A. Welcomes references to discussion paper

B. Sought about empirical evidence of the assertions and its impact to audit

quality

C. Insufficient attention to other dimension of audit quality


Column 19 Professional judgement

A. Respondents stressed out about the importance of professional judgement in

audit quality


Column 20 Quality of people

A. Respondents suggested the imperative of quality of people to deliver audit

quality

B. Respondents suggested that the rotation of partner should be increased

from 5 to 7 years


Column 21 Definition of audit quality

A. Respondents suggested that there should be broad view of definition of audit

quality

B. Respondents stressed out about the importance of outset of audit quality


Column 22 Greater transparency of operation, governance and control of

audit firms

A. Respondents required more information about operation, governance and

control of audit firm

B. Respondents suggested more information on the audit report

C. Respondents suggested that audit firm should be free to exercise their

judgement in how best to make the transparency disclosure

D. Respondents expressed concern the transparency reporting become

standardised and become additional regulatory burden


Column 23 Commercialisation of audit firm

A. Respondents expressed concern about commercialisation of the audit firm

B. Respondents suggested that the provision of non-audit services would

enhance audit quality


Column 24 Changes in auditing/accounting regulation and standards

A. Respondents expressed concern about the effect of the changes to the audit

quality

B. Respondents suggested that the changes have created additional resource

concerns to them


218



Column 25 Principles versus rules

A. Respondents expressed concern that the changes in regulation and

standards is moving away from principles to rules based audit approach

B. Respondents opined that the migration from the principles approach is not

necessarily a threat to audit quality


Column 26 Role and support from audit client

A. Respondents stressed out about the important role and support from audit

client to audit quality


Column 27 Role and support from audit committees

A. Respondents stressed out about the important role and support from audit

committees to audit quality


Column 28 Value of audit report

A. Informative report

NC. No significant comment

Column 29 Professionalism

A. Auditor should exercise professionalism (scepticism, integrity, ethical and

serve the shareholders‘ and other users of account)


Column 30 Independence

A. Independence as another driver of audit quality


Column 31 Effects of current initiatives and projects

A. Enhance confidence to the audit quality

B. Concern about imbalance review by the regulators

C. Regulators should promote principles audit approach


Column 32 Effects to the audit process

A. Express concern about prescriptive audit approach

B. Express concern about global audit standards initiative


Column 33 Documentation

A. Express concern about requirement on documentation

B. Respondents express positive effects of high quality of documentation


219



Column 34 Resource concern

A. Express concern about inadequate time, costs and pressure created by the

current initiatives and projects


Column 35 True and fair view

A. Respondents suggested that audit quality should support auditor true and

fair view

B. Respondents questioned whether true and fair view add value on the audit

C. Respondents suggested that the principle approach is important to

professional judgement to give true and fair view of the financial statement


220

Appendix 2: Analysis of comments submitted to FRC on Discussion Paper Promoting Audit Quality, continued

Column: 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

Questions: Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Q9 Q10 Q11 Q12 Q13 Q14 Q15 Q16 Q17

Audit Firms:

Big Four:

1 PWC NC A/C B A C B A/B NC A B/E A A A A B A A

2 Ernst & Young NC A/C NC A B C NC C NC NC A/D D C B B B NC

3 KPMG B C D A C B D NC B B C B A/B A C A NC

4 Deloitte A A NC A B B B B/F A NC NC A A A B A B

Non-big four

5 BDO Stoy Hayward A C NC A A A NC B/E A NC E E NC C B A C

6 Mazars D A/C NC A C A NC NC C D B A A C A A D

7 Grant Thornton NC C/D A/D A B/C C D A/E NC D B A NC A A A D

8 RSM Robson Rhodes NC A/D A/D A C B NC A D B/E NC A NC NC A A D

Investors:

9 ABI C/E B B A NC NC NC A NC C C NC NC NC NC NC C

10 EPS NC NC NC A A B NC NC NC B NC NC NC A A C NC

11 Hermes E C D A C A NC A D D A/C A A NC A B D

12 IMA E B/D A

A

E B D A NC D C A A A B B NC

13 3i Group Plc NC NC A/D A NC B A/B A/F D B/E NC NC NC NC NC NC NC

14 NAPF E B/C A

A D NC NC NC NC D B/C A B NC B B NC

15 SLI B NC A/B A NC A D NC NC D C C NC A B A D

16. Governance for Owners NA NA NA NA NA NA NA NA NA D NA NA NA NA NA NA NA

17. CPT NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA

221

Appendix 2: Analysis of comments submitted to FRC on Discussion Paper Promoting Audit Quality, continued

Column: 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

Questions: Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Q9 Q10 Q11 Q12 Q13 Q14 Q15 Q16 Q17

Professional bodies:

18. ACCA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA

19. CIMA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA

20. CIPFA NC NC NC A A B NC A NC D NC NC B NC A A A

21. CCAB NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA

22. ICAEW NC A NC A A B C/D C B B C A A/B C C A A

23. ICAS NC A NC A NC B NC E D B NC NC NC A A B D

24. ICAI NC A A/D A B/C B NC A D C/E D C A NC A A D

25. IFAC NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA

26. Centre for Audit Quality NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA

27. ICAEW, London Society D A/C/D C/D A D B D A/C B/E B C B A/C NC B A NC

Corporate:

28. CBI NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA

29. The 100 Group of Fin. Dir NC A/C D A A NC NC A/E D B D A A/D A A B NC

Others:

30. Clifford Moggs NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA

31. IRBA (South Africa) C D/C A A C NC B A NC C A NC NC B A A NC

32. Mr D Alexander NC NC E A A A NC NC NC NC NC NC NC D A A B

33. Mrs M Downes NC NC E NC NC A NC NC NC NC NC NC NC D NC NC NC

34. Mr I Wright NC NC NC A A A NC E F B C C NC NC A A NC

35. NAO (Malta) NC A/B E A NC NC NC A NC D B C NC A A A E

36. ORC NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA

37 ODCE NC NC NC A NC NC NC A NC NC NC C NC NC A A NC

38. Prof JP Percy NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA

39. Wales Audit Office NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA

222

Appendix 2 continued: Analysis of comments submitted to FRC on Discussion Paper Promoting Audit Quality, continued

Column: 18 19 20 21 22 23 24 25 26 27 28 29

30 31 32

33

34

35

Issues: DP PJ QP D&C TRA COM R&S PvR ACL ACO VAL PRO IND EFF APR DOC RES T&f

Audit Firms:

Big Four:

1 PWC A/B/C A A NC NC NC A/B A A A NC A

NC B/C A/B A

NC C

2 Ernst & Young A/C A A NC NC B A/B A A A NC A NC B/C A/B A A C

3 KPMG A/B/C A A/B NC NC B A/B A A A NC NC

NC B/C A/B

NC A C

4 Deloitte A/C A A NC NC NC A/B A A A NC NC NC A/C A/B NC A C

Non-big four

5 BDO Stoy Hayward A NC A/B NC NC NC NC NC NC NC NC NC NC NC A/B NC NC NC

6 Mazars A/C NC A NC NC NC A/B NC A A NC NC NC NC NC NC NC NC

7 Grant Thornton A/B/C A A/B NC C NC A/B A A A NC NC

NC C A/B A

A NC

8 RSM Robson Rhodes A/C A A NC D NC A/B A A A NC NC NC B A/B A A NC

Investors:

9 ABI A/C NC A NC A/B A NC NC A A A A A A C NC NC A

10 EPS A/B NC A NC NC B NC B A A NC NC NC NC NC B NC NC

11 Hermes A A A B A/B NC A A A A NC A A A/C C NC NC NC

12 IMA A/B NC A NC A/B A NC A A A A A

NC

A/C B/C

B

A

NC

13 3i Group Plc A/B NC NC NC A NC NC NC A A NC NC A A B B NC NC

14 NAPF A/B NC NC NC A/B NC NC NC A A NC A

NC

NC B/C

NC NC

NC

15 SLI A/B NC NC NC A/B NC NC NC NC A A NC NC A NC NC NC NC

16. Governance for Owners NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA

17. CPT A NC NC NC A A NC NC NC NC NC A NC NC NC NC NC NC

223

Appendix 2 continued: Analysis of comments submitted to FRC on Discussion Paper Promoting Audit Quality, continued

Column: 18 19 20 21 22 23 24 25 26 27 28

29 30 31 32

33

34

35

Issues: DP PJ QP D&C TRA COM R&S PvR ACL ACO VAL PRO IND EFF APR DOC RES T&f

Professional bodies:

18. ACCA A NA NA NA NA NA NA NA NA NA NC NC NC NC NC NC NC NC

19. CIMA A NC NC NC NC NC NC NC A NC NC NC NC NC NC NC NC NC

20. CIPFA A NC A NC A NC A NC A NC NC NC A NC NC NC A NC

21. CCAB A/C A NC NC NC NC A/B A NC A NC NC NC C A NC NC NC

22. ICAEW A/B/C A A A NC NC A/B A A A NC NC NC B/C A A A C

23. ICAS A/B/C A A/B NC NC NC A/B A A A NC NC NC C A A A C

24. ICAI A/C A A NC A NC A/B A A A NC NC A A/C A NC A NC

25. IFAC A/B NC NC NC NC NC NC NC NC A A NC NC A/C NC NC NC NC

26. Centre for Audit Quality A NC NC NC NC NC NC NC NC NC NC NC NC NC NC NC NC NC

27. ICAEW, London Society A A A NC NC NC A/B A A A NC NC A A/C A NC A NC

Corporate:

28. CBI A/C NC NC NC NC NC NC A NC A NC NC NC A/C A NC NC NC

29. The 100 Group of Fin. Dir. A A NC A NC NC A A NC NC NC A NC C A NC A NC

Others:

30. Clifford Moggs NC NC NC NC NC NC NC NC NC NC NC NC NC NC NC NC NC NC

31. IRBA (South Africa) A NC A NC A NC A A NC NC NC NC NC NC A NC NC NC

32. Mr D Alexander NC NC NC NC NC NC NC NC NC NC NC A NC NC NC NC NC NC

33. Mrs M Downes A NC NC NC NC NC NC NC NC NC NC NC NC NC NC NC NC NC

34. Mr I Wright A NC NC NC NC A NC NC NC NC NC NC NC NC NC NC NC NC

35. NAO (Malta) NC NC A NC NC NC A NC NC NC NC A A NC NC NC A NC

36. ORC A NC NC NC B NC NC NC NC A NC NC NC NC NC NC NC NC

37 ODCE A NC A NC NC NC A NC NC NC A NC A NC A NC NC NC

38. Prof JP Percy NC NC NC NC NC NC NC NC A NC A NC NC NC NC NC NC NC

39. Wales Audit Office A NC NC NC NC NC NC NC A NC NC NC NC NC NC NC NC NC

224

Appendix 3: Letter to Interviewees


The University of Manchester

Booth Street West

Manchester

M15 6PB

www.mbs.ac.uk

Dear

Research on Audit Quality

We are currently undertaking research to investigate the perceptions of key

participants in the audit process concerning the factors that influence audit quality.

This has been a subject of considerable debate over recent years and one that has

attracted interest from the Financial Reporting Council, reflected in their 2007

publication Promoting Audit Quality. It is hoped that our research will both improve

understanding of what steps have been taken to enhance audit quality and

contribute to future policy making in this area.

The attention given to audit quality in recent years may have had a particular

impact within audit firms where the quality of service provided to clients is clearly

of great importance. In order properly to understand how this subject has been

addressed within firms in the recent past, we are conducting interviews with a

number of audit partners from the larger accounting firms and would like to ask if

you would be willing to provide an interview to assist with this study. The interview

would require one hour of your time and would take place at a venue that is

convenient to you. More details concerning the intended topics for discussion will be

provided if you are able to participate but the intended subjects will include the

impact of regulation and how audit quality is promoted and evaluated within

professional firms. The interview will be undertaken by Noor Adwa Sulaiman, a PhD

student at Manchester Business School who is pursuing doctoral studies on this

subject together, where the schedule permits, with me or another co-researcher.

For those participants who are would like to receive information about the research

findings we will also provide a summary of the findings of the study.

We recognise that giving up time to participate in a project like this is not easy but

the subject of this research is an important topic in the modern business

environment and we do hope you will be willing to contribute to the study. If you

are not able to offer a face to face interview but would be willing to participate in a

telephone interview then we would also be interested to hear from you. If you feel

that another of your partners is closer to audit practice and may be better placed to

contribute then please suggest this. Please respond to Ms Sulaiman

([email protected]), to whom any queries may also be

directed. Thank you for your consideration of this approach and your co-operation

will be very much appreciated.

Yours sincerely

Stuart Turley

Professor of Accounting

225

Appendix 3: Letter to Interviewees, continued



Booth Street West

Manchester

M15 6PB

www.mbs.ac.uk









Their relationship, interaction and communication with a company‘s auditors place

audit committee members in an important position to judge audit quality and form

views about the factors that influence quality. Consequently, in order properly to

understand this subject, we are conducting interviews with a number of audit

committee members from UK listed companies and would like to ask if you would

be willing to provide an interview to assist with this study. The interview would

require one hour of your time and would take place at a venue that is convenient to

you. More details concerning the topics for discussion will be provided if you are

able to participate but the intended subjects will include the impact of regulation,

the manner in which audit committees can assess audit quality and the extent to

which they are able to influence that quality in practice. The interview will be

undertaken by Noor Adwa Sulaiman, a PhD student at Manchester Business School

who is pursuing doctoral studies on this subject together, where the schedule

permits, with me or another co-researcher. For those participants who would like to

receive information about the research findings we will also provide a summary of

the findings of the study.



environment and we do hope you will be willing to contribute to the study. If you

are not able to offer a face to face interview but would be willing to participate in a

telephone interview then we would also be interested to hear from you. Please

respond to Ms Sulaiman ([email protected]), to whom any

queries may also be directed. Thank you for your consideration of this approach

and your co-operation will be very much appreciated.

Yours sincerely

Stuart Turley


226

Appendix 3: Letter to Interviewees, continued



Booth Street West

Manchester

M15 6PB

www.mbs.ac.uk


Recently I wrote to you to invite you to participate in a research project currently

being undertaken on audit quality. This topic has been the subject of considerable

debate and the project is concerned specifically with how quality factors influence practice in the conduct of actual audits.

I am writing again simply to emphasise the significant contribution that your

participation can make to the research. It is of particular interest to us to be able to

collect the views and insights of practicing auditors/members of audit committees

We would be especially grateful for your help because it is only by speaking to

people with direct experience of audits currently that we can get an accurate

understanding of audit quality in practice.

If you have not yet made a whether or not to assist with the research and

participate in an interview, then I hope you will be able to respond positively to the

request. (A copy of the text of my original letter is attached.) However, if you have

already replied to the invitation then please accept my apologies for this follow-up

letter which may have crossed in the post with your response.

Finally can I also just restate that protecting the confidentiality of participants‘

views is important to us, and also to the University, and no information will be

referred to in a format which could identify the respondent or firm without permission.

I appreciate your willingness to consider our request.

Yours sincerely

Stuart Turley


227

Appendix 4: Interview Guide

Auditors:

Meaning and construction of audit quality:

1. What sort of attributes do you think people look for in an audit?

2. How do these reflect audit quality?

3. Do you think it is possible for people outside the process to assess audit

quality?

4. How do you evaluate quality on the jobs you control?

5. What are the key characteristics or qualities you look for in the work done?

Factors constitute audit quality in practice:

Judgement and methods

1. How do staff deal with making audit judgement (like fraud risk assessment

or determining nature, timing and extent of testing)?

2. How does the firm‘s audit methodology help to support audit decisions or

audit judgement?

3. What are the important aspects that could support good judgement?

Quality of people

1. How does the firm ensure the audit staff possess the required skills and

experience?

2. What can be monitored?

3. How far does the firm rely on supervision of staff to promote quality?

4. How are varying skills and experiences of staff accommodated without

affecting audit quality?


1. Where does quality fit into the structure of governance and control of the

firm?

2. How does governance and control of the firm ensure high audit quality?

3. Is quality (review) the responsibility of particular individuals?

4. Is quality ‗measured‘? If so, how?

228

Appendix 4: Interview Guide, continued

Culture

1. Can you describe how quality fits into the organizational values of the firm?

2. Are specific things done to promote those values and to encourage

adherence?

3. Can you describe how the values are communicated to the employees of the

firm?

4. What are the impacts of the values to the performance of the staff?

5. How could you monitor the values?

Non-audit services and ethics

1. How are safeguards applied to maintain quality if the firm is also providing

non-audit services?

2. How the audit firm satisfy itself that any safeguards required are

implemented?

Auditors are recognised as professional members that uphold ethics and

professionalism.

1. What policies does the firm have?

2. How are these implemented?

3. How do ensure people don‘t simply give lip service to these values and

standards?

Regulation

1. How have the changes in audit regulation and corporate governance

influence the way you carry out the audit?

2. In general, do you think the changes and reforms have affected the quality

of work of the auditors? (Improved? Deteriorated? How? – can you give

specific example?)

3. How the changes and reforms improve the quality of audit in your firm?

4. Do you think the impact of regulation on quality is different in your firm from

others?

229


In my analysis of responses to the Discussion Paper: Promoting Audit Quality

issued by the FRC, several respondents highlighted some resource concerns in the

audit firm created by the changes and reforms.

1. How the audit regulation creates such problem?

2. Can you describe how the firm handle this?

3. Is there any conflict between cost and quality?

4. How is this handled in the firm?

Auditor and audit committee relationship: 1. Can you tell me about the way you manage the relationship of your firm

with its audit committee?

2. What has changed in time with regards to your relationship with the

company‘s audit committees?

3. How the communication and interaction influences the way you conduct the

audit?

4. Does the audit committee ever have any influence on audit work?

5. Is that impact beneficial to audit quality?

6. Can you give specific examples?

7. How important is a good relationship with the ACs to doing a good audit?

Wrap up questions:

1. How as a partner you are comfortable that there is adequate quality to allow

you to sign the audit report?

Audit committees:

Meaning and construction of audit quality:

1. What sort of attributes do you think people look for in an audit?

2. How do these reflect audit quality?

3. Do you think it is possible for people outside the process to assess audit

quality?

4. How do you evaluate quality on the jobs performed by the auditors?

5. What are the key characteristics or qualities you look for in the work done?

230


Factors constitute audit quality in practice:

Judgement and methods

1. How do you satisfied that the auditors have performed good audit

judgement?

2. In your opinion, how do the audit firm‘s audit methodologies support

auditors in handling the key accounting and auditing judgement?

3. What are the important aspects of the audit methodology that could support

good judgement of the auditors?

Quality of people

1. In your opinion, how do skills and experiences of the auditors contribute to

quality audits?

2. How do ‗quality people‘ have any bearing in the selection process of the

auditor?

3. How do ‗quality people‘ have any influence when you assess the

effectiveness of the audit performed by the auditor?


1. Where does quality fit into the structure of governance and control of the

audit firm?

2. How does governance and control of the firm ensure high audit quality?

3. How information about governance and control of audit firm does influences

the audit tender process (appointment, re-appointment or removal) of the

auditor?

4. How does information about governance and control assist you in assessing

the effectiveness of the audit process?

5. How would you comfortable that the audit firm‘s governance and control will

deliver quality audit?

Culture

1. How is organizational value important in the conduct of the audit?

2. How do the values of the audit firm influence your quality assessments of

the audit firm?

231


Non-audit services and ethics

Issue about the provision of non-audit services appears to be significant concerns

than before

1. Can you describe about mechanisms available in safeguarding the auditor‘s

independence?

2. How does the audit committee satisfy itself that any safeguards required are

implemented?

3. In your opinion, how do the provisions of non-audit services influence the

audit firm‘s performance?

Auditors are recognised as professional members that uphold ethics and

professionalism.

1. In your opinion, how do ethics and professionalism influences the auditor‘s

performance?

Regulation

1. How have the changes in audit regulation and corporate governance

changed your work with the company‘s auditor?

2. In general, do you think the changes and reforms have affected the quality

of work of the auditors? (Improved? Deteriorated? How? – can you give

specific example?)?

3. How have changes and reforms improved the quality of audit performed by

the company‘s auditor?

4. Do you think the impact of regulation on quality is different in your firm from

others?

Auditor and audit committee relationship:

1. Can you tell me about the way you manage the relationship of your firm

with its auditor?

2. What has changed in time with regards to your relationship with the

company‘s auditor?

3. How does communication and interaction influence the way auditor conduct

the audit?

4. Does the audit committee ever have any influence on audit work?

5. Is that impact beneficial to audit quality?

6. Can you give specific examples?

7. How important is a good relationship with the auditor to promote audit

quality?

Wrap up questions:

1. How comfortable are you that there is adequate quality of work performed

by the company‘s auditors?

232

Appendix 5: Survey Questionnaire

A STUDY ON AUDIT QUALITY IN PRACTICE

Dear Mr/Ms








The attention given to audit quality in recent years may have had a particular

impact within audit firms where the quality of service provided to clients is clearly

of great importance. In order properly to understand how this subject has been

addressed within firms in the recent past, we are conducting a survey with a

number of individuals (auditors and non-auditors) and would like to ask if you

would be willing to assist with this study. The survey would require approximately

30 minutes of your time. The information you provide will be treated with strict

confidentiality, and will not be used for any purpose apart from the research. In the

case of publication, only aggregate information will be used without any specific

reference to individual participants.

The questionnaire is structured in several parts covering possible attributes of audit

quality, the impact of various factors on the conduct of the audit, how audit quality

is achieved in practice and also some background information about yourself.



environment and we do hope you will be willing to contribute to the study

Thank you in advance for your kind cooperation.

233

Appendix 5: Survey Questionnaire, continued

Section 1: Please provide some background information about yourself by ticking the most appropriate box in each of the following questions 1. Are you: Male Female ?

2. Which age group are you in?

28 – 37 48 – 57

38 – 47 Over 57

3. What is your highest level of educational qualification?

Bachelor degree Master degree

Doctoral degree Other (please specify)

………………………………

4. What professional qualifications do you hold?

ICAEW ACCA

ICAS Others (please specify)

………………………………

5. What is your principal role in audit inspection?

Leader of inspection team

Member of inspection team

Both leader and member of inspection teams

6. What is your overall experience in auditing practice?

Less than 5 years 11 to 15 years More than 20 years

5 to 10 years 16 to 20 years None

7. What is your experience in audit inspection?

Less than 3 years 3 to 5 years More than 5 years

234


8. In the last year, what proportion of your time has been spent in different types of audit firms in inspection of?

More than fifty percent Less than fifty percent

Big four firms

Other firms

9. In the last year, what proportion of your time has been spent on inspections of different types of audit engagement:

More than fifty percent Less than fifty percent

FTSE 100 companies

Other listed entities

Other public interest entities

235


Section 2: The following statements refer to possible attributes of an audit which could reflect audit quality. Please indicate your personal view of the importance of each statement for audit quality by circling one number on the scale. If you feel the attribute is of little or no importance for high audit quality, please circle the number 1. If you feel the attribute is very important for high audit quality, circle 5. If your feelings are less strong, please circle one of

the numbers in the middle. (Please circle only one response per statement):

Little o

r no

import

ance

Unim

port

ant

Undecid

ed

Import

ant

Very

import

ant

1. The audit is carried out in accordance with auditing standards

1 2 3 4 5

2. The audit is carried out in accordance with ethical standards

1 2 3 4 5

3. The audit is carried out in accordance with quality control standards (ISQC1)

1 2 3 4 5

4. The auditor satisfies the audit client‘s

expectations

1 2 3 4 5

5. The audit is valued by the audit client 1 2 3 4 5

6. The auditor provides good value for money to the audit client

1 2 3 4 5

7. The audit work undertaken is based primarily on an assessment of the risks associated with the client‘s financial statements

1 2 3 4 5

8. The audit work is determined by a proper

planning process

1 2 3 4 5

9. The auditor does sufficient work to obtain sufficient evidence to support an audit opinion

1 2 3 4 5

10. The role of the audit partner is at the centre of the audit process

1 2 3 4 5

11. The work done in carrying out the audit is subject to review before the audit is completed

1 2 3 4 5

12. The auditor reports the correct audit opinion on the financial statements

1 2 3 4 5

13. The auditor demonstrates an appropriate level of challenge to the management of the audit client

1 2 3 4 5

14. The auditor is technically competent 1 2 3 4 5

15. The auditor is independent 1 2 3 4 5

16. The audit meets the quality standards applied internally by the audit firm

1 2 3 4 5

17. The audit is completed in a timely manner 1 2 3 4 5

18. The auditor maintains a high level of documentation in the completed audit files

1 2 3 4 5

19. The auditor maintains a good relationship with the management of the audit client

1 2 3 4 5

20. The auditor maintains effective communication and interaction with the audit committee

1 2 3 4 5

21. The audit firm provides additional services in association with the audit

1 2 3 4 5

22. The audit firm is free from negative findings in inspection reports

1 2 3 4 5

236


Section 3: The following statements refer to aspects of the business, accounting and auditing environment which could have an impact on audit quality. Based on your own experience in auditing, please indicate the strength of your agreement with each statement by circling one number on the scale from 1 where you strongly disagree to 5 where you strongly agree with the statement. (Please circle only one response per statement):

Str

ongly

agre

e

Agre

e

Neutr

al

Agre

e

Str

ongly

dis

agre

e

1. Competition in the audit market has resulted in

a greater focus on meeting client‘s

expectations

1 2 3 4 5

2. Competition in the audit market has resulted in greater emphasis being placed on delivering good value for money to the audit client

1 2 3 4 5

3. Competition in the audit market has resulted in greater attention being given to delivering value added services to the audit client

1 2 3 4 5

4. Competition in the audit market has resulted in greater emphasis being placed on the auditor‘s

relationship with the audit client‘s management

1 2 3 4 5

5. The framework of audit regulation has led to increased focus on conducting an audit beyond the minimum requirements of auditing standards

1 2 3 4 5

6. Changes in the framework of audit regulation

have led to increased emphasis on maintaining adequate audit documentation

1 2 3 4 5

7. Factors in the auditing environment have resulted in extensive internal review of the

audit engagements

1 2 3 4 5

8. Factors in the auditing environment have resulted in greater reliance on consultation within the firm as part of the audit process

1 2 3 4 5

9. The current business environment has resulted

in greater reliance on risk based audit approaches

1 2 3 4 5

10. The current business environment has resulted in greater attention to audit planning

1 2 3 4 5

11. Changes in the framework of audit regulation have created a greater need for the auditor to

demonstrate a challenge to client management

1 2 3 4 5

12. Accounting standards requiring more estimation and judgements have resulted in greater need for technical expertise

1 2 3 4 5

13. The framework of audit regulation has led to greater attention to factors related to the auditor‘s independence from the audit client

1 2 3 4 5

14. The framework of audit regulation has led to

increased focus on conducting an audit beyond the minimum requirements of auditing standards

1 2 3 4 5

15. The framework of audit regulation has resulted in less reliance on the auditor‘s professional judgement

1 2 3 4 5

237


Section 4: The following statements refer to the manner in which audit quality is achieved on individual audit engagements in practice. Based on your experience in inspecting audit engagements, please indicate the strength of your agreement with each statement by circling one number on the scale from 1 where you strongly disagree to 5 where you strongly agree with the statement. (Please circle only one response per statement):

Str

ongly

agre

e

Agre

e

Neutr

al

Agre

e

Str

ongly

dis

agre

e

1. Audit software facilitates compliance with the technical requirements of auditing

standards

1 2 3 4 5

2. Audit software promotes compliance with documentation requirements

1 2 3 4 5

3. Performance appraisal systems within audit

firms increase compliance with the technical requirements of auditing standards

1 2 3 4 5

4. Performance appraisal systems within audit firms improve compliance with documentation requirements

1 2 3 4 5

5. Internal reviews within the audit firm enhance compliance with the technical requirements of auditing standards

1 2 3 4 5

6. Internal reviews within the audit firm improve compliance with documentation

requirements

1 2 3 4 5

7. Risk based audit approaches help the auditor to provide value for money to the client

1 2 3 4 5

8. Risk based audit approaches help the auditor to provide value added services to the audit client

1 2 3 4 5

9. Effective communication from the auditor to client management helps to satisfy the client‘s expectations

1 2 3 4 5

10. Interaction between the auditor and client management enhances the degree to which audit services are valued

1 2 3 4 5

11. Risk based audit approaches facilitate the

achievement of an effective and efficient

audit

1 2 3 4 5

12. The degree of involvement of the audit engagement partner during audit planning influences the quality of the resulting audit process

1 2 3 4 5

13. Technical and other consultations within the firm during planning influence the quality of the resulting audit process

1 2 3 4 5

14. Training within the audit firm enhances the


1 2 3 4 5

15. Internal reviews within the audit firm ensure the delivery of an effective and efficient

audit

1 2 3 4 5

238


Section 4: The following statements refer to the manner in which audit quality is achieved on individual audit engagements in practice. Based on your experience in inspecting audit engagements, please indicate the strength of your agreement with each statement by circling one number on the scale from 1 where you strongly disagree to 5 where you strongly agree with the statement. (Please circle only one response per statement):

Str

ongly

agre

e

Agre

e

Neutr

al

Agre

e

Str

ongly

dis

agre

e

16. Audit software facilitates the achievement of an effective and efficient audit

1 2 3 4 5

17. Training within the audit firm enhances auditors‘ technical expertise

1 2 3 4 5

18. Training within the audit firm improves auditors‘ ability to challenge the management of audit clients

1 2 3 4 5

19. Technical and other consultations within the audit firm enhance the quality of

judgements made during the completion of the audit

1 2 3 4 5

20. Internal reviews within the audit firm enhance the quality of audit judgements made during the audit

1 2 3 4 5

21. Internal reviews within the audit firm enhance auditors technical expertise

1 2 3 4 5

22. Internal reviews within the audit firm ensure the auditor‘s independence from the audit client

1 2 3 4 5

23. Audit firm methodologies and manuals improve the quality of audit judgement

applied during the audit

1 2 3 4 5

24. Audit firm methodologies and manuals enhance the auditor‘s ability to challenge client management

1 2 3 4 5

25. Performance appraisal systems within the

audit firm improve the auditor‘s independence

1 2 3 4 5

26. Performance appraisal systems within the audit firm enhance the auditor‘s technical expertise

1 2 3 4 5

27. Interaction between the auditor and the audit committee is influential in determining the content of audit work undertaken

1 2 3 4 5

28. Interaction between the auditor and the audit committee facilitate the right audit

opinion being reported

1 2 3 4 5

239


Section 5: The following statements refer to possible issues that may arise in the

process of inspection. Please indicate your personal experience of the occurrence of

issues by ticking one number on the scale. If you feel issue never or rarely occur

please tick the number 1. If you feel the issue always occur, tick 5. If your feelings

are less strong, please tick one of the numbers in the middle. (Please tick only one

response per statement):

Never

Occasio

nally

Seld

om

Fre

quently

Alw

ays

1. How often in the process of inspection do issues arise concerning the sufficiency of

audit work?

1 2 3 4 5

2. How often in the process of inspection do issues arise concerning the appropriateness of the audit opinion?

1 2 3 4 5

3. How often in the process of inspection do issues arise concerning compliance with ethical standards?

1 2 3 4 5

4. How often in the process of inspection do issues arise concerning compliance with international accounting standards (IAS)?

1 2 3 4 5

5. How often in the process of inspection do issues arise concerning the adequacy of

audit documentation?

1 2 3 4 5

6. How often in the process of inspection do

issues arise concerning the adequacy of the auditor's 'challenge' to management?

1 2 3 4 5

7. How often in the process of inspection do issues arise concerning compliance with auditing standards?

1 2 3 4 5

8. How often in the process of inspection are issues that arise resolved by discussion with the audit team?

1 2 3 4 5

240


Section 6A: The following statements refer to general propositions about audit

quality in practice. Please tick one number for each statement to indicate the

strength of your agreement with that statement, where 1 indicates that you

strongly disagree and 5 that you strongly agree with the statement. (Please tick

only one response per statement)

Str

ongly

agre

e

Agre

e

Neutr

al

Agre

e

Str

ongly

dis

agre

e

1. In general, the quality of auditing in the UK is high

1 2 3 4 5

2. The quality of auditing in the UK has

increased during the last decade

1 2 3 4 5

3. The quality of auditing in the UK has decreased during the last decade

1 2 3 4 5

4. There is a high level of consistency between audits in the quality of auditing achieved in practice

1 2 3 4 5

5. There is considerable variation between audits in the quality of auditing achieved

in practice

1 2 3 4 5

6. In general market participants perceive the standard of audit quality to be adequate

1 2 3 4 5

7. General concerns about audit quality in recent years are based on a proper understanding of the conduct of audits in

practice

1 2 3 4 5

Section 6B: Based upon what you have seen, heard, and experienced during audit

inspections, please rank the following items according to their importance as

influences on the conduct of audits in practice. Place a "1" next to the item that you

consider to be most influential, a "2" next to the item that is next most influential,

and so on. No two items can have the same ranking.

a. The approach to the conduct of audits in practice reflects the compliance

obligations placed on the public accounting firm __________

b. The approach to the conduct of audits in practice reflects the commercial values

of the public accounting firm __________

c. The approach to the conduct of audits in practice reflects the professional values

of the public accounting firm __________

Thank you for answering this questionnaire.

241

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